NBER WORKING PAPER SERIES

RELATIONSHIP AND TRANSACTION LENDING IN A CRISIS
Patrick Bolton
Xavier Freixas
Leonardo Gambacorta
Paolo Emilio Mistrulli
Working Paper 19467
http://www.nber.org/papers/w19467
NATIONAL BUREAU OF ECONOMIC RESEARCH
1050 Massachusetts Avenue
Cambridge, MA 02138
September 2013
We would like to thank Claudio Borio, Mariassunta Giannetti, Roman Inderst, Natalya Martinova,
Lars Norden, Enrico Perotti, Joel Shapiro, Greg Udell and in particular two anonymous referees for
comments and suggestions. Support from 07 Ministerio de Ciencia e Innovación, Generalitat de Catalunya,
Barcelona GSE, Ministerio de Economía y Competitividad) - ECO2008-03066, Banco de España-Excelencia
en Educación-"Intermediación Financiera y Regulación" is gratefully acknowledged. This study was
in part developed while Paolo Emilio Mistrulli was ESCB/IO expert in the Financial Research Division
at the European Central Bank. The views expressed herein are those of the authors and do not necessarily
reflect the views of the Bank of Italy, the Bank for International Settlements, or the National Bureau
of Economic Research.
NBER working papers are circulated for discussion and comment purposes. They have not been peer-
reviewed or been subject to the review by the NBER Board of Directors that accompanies official
NBER publications.
© 2013 by Patrick Bolton, Xavier Freixas, Leonardo Gambacorta, and Paolo Emilio Mistrulli. All
rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit
permission provided that full credit, including © notice, is given to the source.
Relationship and Transaction Lending in a Crisis
Patrick Bolton, Xavier Freixas, Leonardo Gambacorta, and Paolo Emilio Mistrulli
NBER Working Paper No. 19467
September 2013
JEL No. G01,G21,G32
ABSTRACT
We study how relationship lending and transaction lending vary over the business cycle. We develop
a model in which relationship banks gather information on their borrowers, which allows them to provide
loans for profitable firms during a crisis. Due to the services they provide, operating costs of relationship-
banks are higher than those of transaction-banks. In our model, where relationship-banks compete
with transaction-banks, a key result is that relationship-banks charge a higher intermediation spread
in normal times, but offer continuation-lending at more favorable terms than transaction banks to profitable
firms in a crisis. Using detailed credit register information for Italian banks before and after the Lehman
Brothers' default, we are able to study how relationship and transaction-banks responded to the crisis
and we test existing theories of relationship banking. Our empirical analysis confirms the basic prediction
of the model that relationship banks charged a higher spread before the crisis, offered more favorable
continuation-lending terms in response to the crisis, and suffered fewer defaults, thus confirming the
informational advantage of relationship banking.
Patrick Bolton
Columbia Business School
804 Uris Hall
New York, NY 10027
and NBER
pb2208@columbia.edu
Xavier Freixas
Universitat Pompeu Fabra
Department of Economics and Business
Ramon Trias Fargas, 25-27
08005 Barcelona
Spain
xavier.freixas@upf.edu
Leonardo Gambacorta
Bank for International Settlements
Centralbanplatz, 2 4002 Basel
Switzerland
leonardo.gambacorta@bis.org
Paolo Emilio Mistrulli
Structural Economic Analysis Department
Bank of Italy
via Nazionale 91, 00184 Rome (IT)
paoloemilio.mistrulli@bancaditalia.it
1 Introduction
1
How do banks help their corporate borrowers through a crisis? Beyond pro-
viding loans to firms, commercial banks have long been thought to play a
larger role than simply screening loan applicants one transaction at a time.
By building a relationship with the firms they lend to, banks also play a
continuing role of managing firms’ financial needs as they arise, whether in
response to new investment opportunities or to a crisis. What determines
whether a bank and a firm build a long-term relation, or whether they simply
engage in a market transaction? And, how do relationship and transaction
lending differ in a crisis? Our knowledge so far is still limited. To quote
Allen Berger, “What we think we know about small versus large banks (...)
in small business lending may not be true and we know even less about them
during financial crises”.
2
We address these questions from both a theoretical
and empirical perspective.
Existing theories of relationship banking typically do not allow for aggre-
gate shocks and crises. Thus, we expand the relationship lending model of
Bolton and Freixas (2006) by introducing an aggregate shock along idiosyn-
cratic cash-flow risk for non-financial corporations. In the expanded model
firms differ in their exposure to the aggregate shock and therefore may have
different demands for the financial flexibility provided by relationship bank-
ing. To be able to bring the model to the data we introduce a further critical
modification to the Bolton and Freixas model by allowing firms to borrow
from multiple banks on either a transaction or relationship basis.
3
1
We would like to thank Claudio Borio, Mariassunta Giannetti, Roman Inderst, Natalya
Martinova, Lars Norden, Enrico Perotti, Joel Shapiro, Greg Udell and in particular two
anonymous referees for comments and suggestions. The opinions expressed in this paper
are those of the authors only and do not necessarily reflect those of the Bank of Italy or the
Bank for International Settlements. Support from 07 Ministerio de Ciencia e Innovación,
Generalitat de Catalunya, Barcelona GSE, Ministerio de Economía y Competitividad) -
ECO2008-03066, Banco de España-Excelencia en Educación-“Intermediación Financiera
y Regulación” is gratefully acknowledged. This study was in part developed while Paolo
Emilio Mistrulli was ESCB/IO expert in the Financial Research Division at the European
Central Bank.
2
Keynote address, Indiana Review of Finance Conference, Dec. 2012.
3
The Bolton and Freixas (2006) model of relationship banking considers firms’ choice
of the optimal mix of financing between a long-term banking relationship and funding
2
The main predictions from the theoretical analysis are: first, that firms
will generally seek a mix of relationship lending (or, for short, 1−banking)
and transaction lending (or 1−banking); second, the firms relying on 1−banks
are the ones that are more exposed to business-cycle risk and that have the
riskier cash flows. These firms are prepared to pay higher borrowing costs on
their relationship loans in normal times in order to secure better continuation
financing terms in a crisis. Third, the firms relying on a banking relation are
better able to weather a crisis and are less likely to default than firms relying
only on transaction lending, even though the underlying cash flow risk of
firms borrowing from an 1−bank is higher than that of firms relying only
on 1−banking. Fourth, interest rates on 1−loans are countercyclical: they
are higher than interest rates on 1−loans in normal times and lower in crisis
times.
We test these predictions by looking at bank lending to firms in Italy be-
fore and after the Lehman Brother’s default. Following Detragiache, Garella
and Guiso (2000), we use the extremely detailed credit registry information
on corporate lending by Italian banks, which allows us to track Italian firms’
borrowing behavior before and after the crisis of 2008-09 at the individual
firm and bank level. The empirical analysis confirms the predictions of the
model. In particular, that relationship banks charged a higher spread before
the crisis, offered more favorable continuation-lending terms in response to
the crisis, and suffered fewer defaults, thus confirming the informational and
financial flexibility advantage of relationship banking.
Our study is the first to consider how relationship lending responds to
a crisis in a comprehensive way both from a theoretical and an empirical
perspective. Our sample covers loan contracts by a total of 179 Italian banks
to more than 72.000 firms over the time period ranging from 2007 to 2010,
with the collapse of Lehman Brothers marking the transition to the crisis.
The degree of detail of our data goes far beyond what has been available
in previous studies of relationship banking. For example, one of the most
important existing studies by Petersen and Rajan (1994) only has data on
firms’ balance sheets and on characteristics of their loans, without additional
through a corporate bond issue. Most firms in practice are too small to be able to tap
the corporate bond market, and the choice between issuing a corporate bond or borrowing
from a bank is not really relevant to them. However, as we know from Detragiache, Garella
and Guiso (2000) these firms do have a choice between multiple sources of bank lending
(see also Bolton and Scharfstein, 1996; Houston and James, 1996; Farinha and Santos,
2002).
3
specific information on the banks firms are borrowing from.
4
As a result
they cannot control for bank specific characteristics. We are able to do
so for both bank and firm characteristics, since we observe each bank-firm
relationship. More importantly, by focusing on multiple lender situations we
can run estimates with both bank and firm fixed effects, thus controlling for
observable and unobservable supply and demand factors. We are therefore
able to precisely uncover the effects of bank-firm relationship characteristics
on lending. It turns out that our results differ significantly depending on
whether we include or exclude these fixed effects, revealing that the lack of
detailed information on each loan may lead to biases if, as one may expect, the
heterogeneity of banks (small, regional, large, mutuals,...) maps into different
lending behaviors that only bank fixed effects can identify. Also, unlike the
vast majority of existing empirical studies, our database includes detailed
information on interest rates for each loan. This allows us to investigate
bank interest rate determination in good and bad times in a direct way,
without relying on any assumptions.
5
Overall, our study suggests that relationship banking plays an important
role in dampening the effects of negative shocks following a crisis. The firms
that rely on relationship banks are less likely to default on their loans and are
better able to withstand the crisis thanks to the more favorable continuation
lending terms they can get from 1−banks. These findings suggest that the
focus of Basel III on core capital and the introduction of countercyclical
capital buffers could enhance the role of 1−banks in crises and reduce the
risk of a major credit crunch especially for the firms that choose to rely on
4
They have a dummy variable taking the value 1 if the loan has been granted by a
bank and 0 if granted by another financial institution, but they do not have information
on which bank has granted the loan and they do not have balance sheet information on
the bank.
5
In one related paper Gambacorta and Mistrulli (2013) investigate whether bank and
lender-borrower relationship characteristics had an impact on the transmission of the
Lehman default shock by analysing changes in bank lending rates over the period 2008:Q3-
2010:Q1. Bonaccorsi di Patti and Sette (2012) take a similar approach over the period
2007:Q2-2008:Q4, while Gobbi and Sette (2012) consider 2008:Q3-2009:Q3. Albertazzi
and Marchetti (2010) and De Mitri et al. (2010) complement the previous studies by
investigating the effect of the financial crisis on |c:di:q qront/. In this paper, we focus
instead on the level of lending rates and the quantity of credit (instead than their respec-
tive changes). Moreover, we analyse the behaviour of relationship and transactional banks
by comparing bank prices and quantities both in “normal” times and in a crisis. Although
our results are not perfectly comparable, they are consistent with the above cited papers.
4
1−banks.
Related Literature: Relationship banking can take different forms, and
most of the existing literature emphasizes benefits from a long-term banking
relation to borrowers that are different from the financial flexiblity benefits
that we model. The first models on relationship banking portray the relation
between the bank and the firm in terms of an early phase during which
the bank acquires information about the borrower, and a later phase during
which it exploits its information monopoly position (Sharpe 1990). While
these first-generation models provide an analytical framework describing how
the long-term relation between a bank and a firm might play out, they do
not consider a firm’s choice between transaction lending and relationship
banking, and which types of firms are likely to prefer one form of borrowing
over the other. They also do not allow for any firm bargaining power at
the default and renegotiation stage, as we do following Diamond and Rajan
(2000, 2001, and 2005).
The second-generation papers of relationship banking that consider this
question and that have been put to the data focus on three different and
interconnected roles for an 1−bank: insurance, monitoring and screening.
A first strand of studies focuses on the (implicit) insurance role of 1−banks
against the risk of changes in future credit terms (Berger and Udell, 1992;
Berlin and Mester 1999); a second strand focuses on the monitoring role of
1−banks (Holmstromand Tirole 1997, Boot and Thakor 2000, Hauswald and
Marquez 2000); and a third strand plays up the greater screening abilities of
new loan applications of 1−banks due to their access to both hard and soft
information about the firm (Agarwal and Hauswald 2010, Puri et al. 2010).
Our theory is closest to a fourth strand which emphasizes the 1−banks’
ability to learn about changes in the borrower’s creditworthiness, and to
adapt lending terms to the evolving circumstances the firm finds itself in
(Rajan, 1992 and Von Thadden, 1995). Interestingly, these four different
strands have somewhat different empirical predictions. Overall, our empirical
results suggest that only the predictions of the fourth strand of theories are
fully confirmed in our data. While all theories predict that 1−banks have
lower loan delinquency rates than 1−banks, only the fourth strand of theories
predicts that 1−banks raise loan interest rates more than 1−banks in crisis
times.
The structure of the paper is the following. In section 2 we describe the
theoretical model of 1−banking and 1−banking and in section 3 the com-
bination of the two forms of funding by firms. In section 4 we compare the
5
firm’s benefits from pure 1−banking with the ones of mixed finance, and the
implication for the capital buffers the banks have to hold. In section 5 we
describe the database and we test the model’s predictions. Section 6 com-
pares our results with those derived by other types of theories of relationship
banking. The last section concludes.
2 The model
We consider the financing choices of a firm that may be more or less ex-
posed to business-cycle risk. The firm may borrow from a bank offering
relationship-lending services, an 1−bank, or from a bank offering only trans-
action services, a 1−bank. As we explain in greater detail below, 1−banks
have higher intermediation costs than 1−banks, j
1
j
T
, because they have
to hold more equity capital against the expectation of more future roll-over
lending. We shall assume that the banking sector is competitive, at least
ex ante, before a firm is locked into a relationship with an 1−bank. There-
fore, in equilibrium each bank just breaks even and makes zero supra-normal
profits. We consider in turn, 100% 1− bank lending, 100% 1−bank lending,
and finally a combination of 1 and 1−bank lending.
2.1 The Firm’s Investment and Financial Options
The firm’s manager-owners have no cash but have an investment project
that requires an initial outlay of 1 = 1 at date t = 0 to be obtained through
external funding. If the project is successful at time t = 1, it returns \
1
. If
it fails, it is either liquidated, in which case it produces \
1
at time t = 1,
or it is continued in which case the project’s return depends on the firm’s
type, H or 1. For the sake of simplicity, we assume that the probability of
success of a firm is independent of its type. An H−firm’s expected second
period cash flow is \
1
, while it is zero for an 1−firm. The probability that a
firm is successful at time t = 1 is observable, and the proportion of H−firms
is known. Moreover, both the probability of success and the proportion of
H−firms change with the business cycle, which we model simply as two
distinct states of the world: a good state for booms (o = G) and a bad state
for recessions (o = 1). Figure 1 illustrates the different possible returns of
the project depending on the bank’s decision to liquidate or to roll over the
6
unsuccessful firm at time t = 1.
6
We denote the firms’ probability of success at t = 1 as j
S
, with j
G
j
1

0. We further simplify our model by making the idiosyncratic high (\
1
) and
low (0) returns of firms at time t = 2 independent of the business cycle; only
the population of H−firms, which we denote by i
S
will be sensitive to the
business cycle. Finally, recession states (o = 1) occur with probability o
and boom states (o = G) occur with the complementary probability (1 −o).
The prior probability (at time t = 0) that a firm is of type H is denoted
by i. This probability belief evolves to respectively i
1
in the recession state
and i
G
in the boom state at time t = 1, with i
1
< i
G
. The conditional
probability of a firm being of type H knowing it has defaulted in time t = 1
will be denoted by
i ≡
(1 −o)(1 −j
G
)i
G
+o(1 −j
1
)i
1
(1 −j)
.
As in Bolton and Freixas (2006), we assume that the firm’s type is private
information at time t = 0 and that neither 1 nor 1 banks are able to identify
the firm’s type at t = 0. At time t = 1 however, 1−banks are able to observe
the firm’s type perfectly by paying a monitoring cost : 0, while 1−banks
continue to remain ignorant about the firm’s type (or future prospects).
Firms differ in the observable probability of success j = oj
1
+(1 −o)j
G
.
For the sake of simplicity we take j
G
= j
1
+ ∆ and assume that j
G
is
uniformly distributed on the interval [∆. 1], so that j
1
is l ∼ [0. 1 −∆] and
j is l ∼ [(1 −o)∆. 1 −o∆]. Note that for every j there is a unique pair
(j
1
. j
G
) so that all our variables are well defined.
Firms can choose to finance their project either through a transaction
bank or through a relationship bank (or a combination of transaction and re-
lationship loans). To keep the corporate financing side of the model as simple
as possible, we do not allow firms to issue equity. The main distinguishing
features of the two forms of lending are the following:
6
A model with potentially infinitely-lived firms subject to periodic cash-flow shocks
and that distinguishes between the value to the firm and to society of being identified as
an H-type, would be a better representation of actual phenomena. In a simplified way our
model can be reinterpreted so that the value of , takes already into account this long run
impact on the firms’ reputation. Still, a systematic analysis of intertemporal effects would
require tracking the balance sheets for both the firm and of two types of banks as state
variables of the respective value functions and would lead to an extremely complex model.
7
1. Transaction banking: a transaction loan specifies a gross repayment
:
T
(j) at t = 1. If the firm does not repay, the bank has the right to
liquidate the firm and obtains \
1
. But the bank can also offer to roll
over the firm’s debt against a promise to repay :
S
T
(j
S
) at time t = 2.
This promise :
S
T
(j
S
) must, of course, be lower than the firm’s expected
second period pledgeable cash flow, which is \
1
for an H−firm and
zero for an 1−firm. Thus, if the transaction bank’s belief i
S
that it is
dealing with an H−firm is high enough, so that
:
S
T
(j
S
) ≤ i
S
\
1
.
the firm can continue to period t = 2 even when it is unable to repay
its debt :
T
(j) at t = 1. If the bank chooses not to roll over the firm’s
debt, it obtains the liquidation value of the firm’s assets \
1
at t = 1.
The market for transaction loans at time t = 1 is competitive and
since no bank has an informational advantage on the credit risk of the
firm the roll-over terms :
S
T
(j
S
) are set competitively. Consequently, if
gross interest rates are normalized to 1, competition in the 1−banking
industry implies that
i
S
:
S
T
(j
S
) = :
T
(j). (1)
(when the project fails at time t = 1 the firm has no cash flow available
towards repayment of :
T
(j); it therefore must roll over the entire loan
to be able to continue to date t = 2).
For simplicity, we will assume that in the boom state an unsuccessful
firm will always be able to get a loan to roll over its debt :
T
(j):
:
T
(j)
i
G
≤ \
1
. (2)
A sufficient condition for this inequality to hold is that it is satisfied
for j
G
= ∆.
7
By the same token, in a recession state firms with a high probability
of success will be able to roll over their debt :
T
(j) if i
1
is such that
:
T
(j)
i
1
≤ \
1
. (3)
7
Note that the condition is not necessary as in equilibrium some firms with low j may
not be granted credit at time t = 0 anyway.
8
This will occur only for values of j
1
above some threshold ˆ j
1
for which
condition (3) holds with equality, a condition that, under our assump-
tions, is equivalent to j ≥ b j. where b j = ˆ j
1
+(1 −o)∆. In other words,
for low probabilities of success j < b j, an unsuccessful firm at t = 1
in the recession state will simply be liquidated, and the bank then re-
ceives \
1
, and for higher probabilities of success, j ≥ b j (or j
1
≥ ˆ j
1
)
an unsuccessful firm at t = 1 in the recession state will be able to roll
over its debt. Figure 2 illustrates the different contingencies for the
case j
1
≥ ˆ j
1
.
2. Relationship banking: Under relationship banking the bank incurs
a monitoring cost : 0 per unit of debt,
8
which allows the bank to
identify the type of the firm perfectly in period 1. A bank loan in period
0 specifies a repayment :
1
(j) in period 1 that has to compensate the
bank for its higher funding costs j
1
j
T
.
The higher cost of funding is due to the need of holding higher amounts
of capital that are required in anticipation of future roll-overs. It can
be shown, by an argument along the lines of Bolton and Freixas (2006),
that as the 1-banks are financing riskier firms, even if, on average their
interest rates will cover the losses, they need additional capital. In ad-
dition 1-banks refinance H-firms and they do so by supplying lending
to those firms that do not receive a roll-over from 1−banks. As a con-
sequence, they also need more capital because of capital requirements
due to the expansion of lending to H−firms.
If the firm is unsuccessful at t = 1 the relationship bank will be able
to extend a loan to all the firms it has identified as H−firms and then
determines a second period repayment obligation of :
1
1
. As the bank
is the only one to know the firm’s type, there is a bilateral negotiation
over the terms :
1
1
between the firm and the bank. We let the firm’s
bargaining power be (1 − ,) so that the outcome of this bargaining
process is :
1
1
= ,\
1
and the H−firm’s surplus from negotiations is
(1 −,)\
1
.
In sum, the basic difference between transaction lending and relationship
8
Alternatively, the monitoring cost could be a fixed cost per firm, and the cost would
be imposed on the proportion i of good firms in equilibrium. This alternative formulation
would not alter our results.
9
lending is that transaction banks have lower funding costs at time t = 0 but
at time t = 1 the firm’s debt may be rolled over at dilutive terms if the
transaction bank’s beliefs that it is facing an H−firm i
1
are too pessimistic.
Moreover, the riskiest firms with j < b j will not be able to roll over their
debts with a transaction bank in the recession state. Relationship banking
instead offers higher cost loans initially against greater roll-over security but
only for H−firms.
3 Equilibrium Funding
Our set up allow us to determine the structure of funding and interest rates
at time t = 1 and t = 2 under alternative combinations of transaction and
relationship loans. We will consider successively the cases of pure transaction
loans, pure relationship loans, and a combination of the two types of loans.
We assume for simplicity that the intermediation cost of dealing with a bank,
whether 1−bank or 1−bank is entirely ‘capitalized’ in period 0 and reflected
in the respective costs of funds, j
T
and j
1
. We will assume as in Bolton and
Freixas (2000, 2006) that H−firms move first and 1−firms second. The latter
have no choice but to imitate H−firms by pooling with them, for otherwise
they would perfectly reveal their type and receive no funding.
Transaction Banking: Suppose that the firmfunds itself entirely through
transaction loans. Then the following proposition characterizes equilibrium
interest rates and funding under transaction loans.
Proposition 1: Under 1−banking, firms characterized by j ≥ b j are
never liquidated and pay an interest rate
:
S
T
=
1
i
S
on their rolled over loans.
For firms with j < b j there is no loan roll-over in recessions, and the
roll-over of debts in booms is granted at the equilibrium repayment promise:
:
G
T
=
1
i
G
.
10
The equilibrium lending terms in period 0 are then:
:
T
(j) = 1 +j
T
for j ≥ b j. (4)
:
T
(j) =
1 +j
T
−o(1 −j
1
)\
1
oj
1
+ 1 −o
for j < b j.
Proof: See Appendix A. ¥
Relationship Banking: Consider now the other polar case of exclu-
sive lending from an 1−bank. The equilibrium interest rates and funding
dynamics are then given in the following proposition.
Proposition 2: Under relationship-banking there is always a debt roll-
over for H−firms at equilibrium terms
:
1
1
= ,\
1
.
The equilibrium repayment terms in period 0 are then given by:
:
1
(j) =
1 +j
1
−(1 −j)[(1 −i)\
1
+i(1 −:),\
1
]
oj
1
+ (1 −o)j
G
. (5)
Proof: See Appendix A. ¥
Combining 1 and 1−banking: In the previous two cases of either
pure 1 banking or pure 1−banking the structure of lending is independent
of the firm’s type. When we turn to the combination of 1 and 1−banking,
the firms’ choice might signal their type. As mentioned this implies that the
1−firms will have no choice but to mimick the H−firms.
Given that transaction loans are less costly (j
T
< j
1
) it makes sense for
a firm to rely as much as possible on lending by 1−banks. However, there is
a limit on how much a firm can borrow from 1−banks, if it wants to be able
to rely on the more efficient debt restructuring services of 1−banks. The
limit comes from the existence of a debt overhang problem if the firms are
overindebt with 1−banks.
To see this, let 1
1
and 1
T
denote the loans granted by respectively
1−banks and by 1−banks at t = 0, with 1
1
+1
T
= 1. Also, let :
1T
1
and :
1T
T
denote the corresponding repayment terms under each type of loan. When a
firm has multiple loans an immediate question arises: what is the seniority
11
structure of these loans? As is common in multiple bank lender situations,
we shall assume that 1−bank loans and 1−bank loans are pari passu in the
event of default. Under this assumption, the following proposition holds:
Proposition 3: The optimal loan structure for H−firms is to maxi-
mize the amount of transactional loans subject to satisfying the relationship
lender’s incentive to roll over the loans at t = 1.
The firm borrows:
1
T
=
(j + (1 −j)i)
£
,\
1
(1 −:) −\
1
¤
1 +j
T
−\
1
. (6)
in the form of a transaction loan, and (1−1
T
) from an 1−bank at t = 0
at the following lending terms:
:
1T
T
=
(1 +j
T
) −(1 −j)(1 −i)\
1
j + (1 −j)i
. (7)
and,
:
1T
1
=
1
j

(1 +j
1
) −
(1 −j)\
1
(1 −1
T
)
¸
. (8)
At time t = 1 both transaction and relationship-loans issued by H − firms
are rolled over by the 1-bank. Neither loan issued by an 1 − firm is rolled
over.
Proof: See Appendix A. ¥
As intuition suggests: i) pure relationship lending is dominated under our
assumptions; and ii) if the bank has access to securitization or other forms of
funding to obtain funds on the same terms as 1−banks, then it can combine
the two.
Note finally that, as 1−loans are less expensive, a relatively safe firm
(with a high j) may still be better off borrowing only from 1−banks and
taking the risk that with a small probability it won’t be restructured in
bad times. We turn to the choice of optimal mixed borrowing versus 100%
1−financing in the next section.
12
4 Optimal funding choice
When would a firm choose mixed financing over 100% 1−financing? To
answer this question we need to consider the net benefit to an H−firm from
choosing a combination of 1 and 1−bank borrowing over 100% 1−bank
borrowing. We will make the following plausible simplifying assumptions in
order to focus on the most interesting parameter region and limit the number
of different cases to consider:
Assumption A1: Both (j
1
−j
T
) and : are small enough.
Assumption A2: ,\
1
−\
1
is not too large so that it satisfies:
,\
1
−\
1
< min
(
(1 +j
T
)[
(1−0)
i

+
0
i

−1]
(1 −[(1 −o)i
G
+oi
1
])
.
o(1 −j
1
)(\
1
−\
1
)
(1 −j)(1 −i)
)
These two conditions essentially guarantee that relationship banking has
an advantage over transaction banking. For this to be true, it must be the
case that: First, the intermediation cost of relationship banks is not too large
relative to that of transaction banks. Assumption A1 guarantees that this is
the case. Second, the cost of rolling over a loan with the 1−bank should not
be too high. This means that the 1−bank should have a bounded ex post
information monopoly power. This is guaranteed by assumption A2.
To simplify notation and obtain relatively simple analytical expressions,
we shall also assume that \
1

v

(j)
i

. The last inequality further implies
that \
1

v

(j)
i

. as i
G
i
1
. so that the firm’s debts will be rolled over by
the 1−bank in both boom and bust states of nature. Note that when this is
the case the transaction loan is perfectly safe, so that :
T
(j) = 1 + j
T
. as in
equation (4).
We denote by ∆Π(j) = Π
T
(j)−Π
1T
(j) the difference in expected payoffs
for an H−firm from choosing 100% 1−financing over choosing a combination
of 1 and 1−loans and establish the following proposition.
Proposition 4: Under assumptions A1 and A2, the equilibrium funding
in the economy will correspond to one of the three following configurations:
1. ∆Π(j
min
) ≡ ∆Π((1 −o)∆) 0: monitoring costs are excessively high
and all firms prefer 100% transactional banking.
13
2. ∆Π(j
max
) ≡ ∆Π(1−o∆) 0 and ∆Π(j
min
) ≡ ∆Π((1−o)∆) < 0: Safe
firms choose pure 1−banking and riskier firms choose a combination
of 1−banking and 1-banking.
3. ∆Π(j
max
) ≡ ∆Π(1 − o∆) < 0: all firms choose a combination of
1−banking and 1−banking.
Proof: See Appendix A. ¥
We are primarily interested in the second case, where we have coexistence
of 100% 1−banking by the safest firms along with other firms combining
1−Banking and 1−banking. Notice, that under assumptions A1 and A2, it
is possible to write
∆Π((1 −o)∆) = (j
1
−j
T
)(1 −1

T
) + (1 −(1 −o)∆)
£
i:,\
1
¤
+o∆(1 +j
T
) + (1 −(1 −o)∆)(1 −i)(,\
1
−\
1
)
−(1 +j
T
)[
(1 −o)(1 −∆)
i
G
+
o
i
1
] (9)
and
∆Π(1 −o∆) = (1 +j
1
) −(j
1
−j
T
)1

T
−o∆
£
i(1 −:),\
1
+ (1 −i)\
1
¤
−(1 −o∆)(1 +j
T
) +o∆,\
1
−(1 +j
T
)[
o∆
i
1
]. (10)
Under assumption A1 (j
1
− j
T
) and : are small, so that a sufficient
condition to obtain ∆Π(1 −o∆) 0 is to have o∆ sufficiently close to zero.
Indeed, then we have:
∆Π(1 −o∆) ≈ (j
1
−j
T
)(1 −1

T
) 0
To summarize the testable hypotheses coming from our theoretical model
are the following:
14
1 1−banks are better able than 1−banks at learning firms’ type. In a
crisis, the rate of default on firms financed through transaction loans
will be higher than the rate on firms financed by 1−banks.
2 1−banks charge higher lending rates in good times on the loans they
roll over, but in bad times they lower rates to help their best clients
through the crisis. 1−banks increase their supply of lending (relative
to 1−banks) in bad times.
3 It exists a critical threshold for the probability of success in bad time ˆ j
1
such that for any j
1
≥ ˆ j
1
firms prefer pure transactional banking and
for any j
1
< ˆ j
1
firms prefer to combine the maximum of transactional
banking and the minimal amount of relationship banking.
4 Banks need a capital buffer to be used in order to preserve the lending
relationship in bad times. This implies that the capital buffer of an
1−bank (which makes additional loans to good firms in distress) will
have to be higher than the one of a 1−bank. This is consistent with
1−banks quoting higher interest rates in normal times.
5 Data and empirical findings
We now turn to the empirical investigation of relationship banking over the
business cycle. A key test we are interested in is whether 1−banks charge
higher lending rates in good times and lower rates in bad times to help their
best clients through the crisis, and, similarly, whether 1−banks offer cheaper
loans in good times but roll over fewer loans in bad times. Another related
prediction from our theoretical analysis we test is whether we observe lower
delinquency rates in bad times for 1−banks that roll over their loans. To
test these predictions, we proceed in two steps. First we analyze how firms’
default probability in bad times is influenced by the fact that the loan is
granted by an 1−bank or a 1−bank. Second, we analyze (and compare)
lending and bank interest rate setting in good times and bad times. Our
dataset comes from the Italian Credit Register (CR) maintained by the Bank
of Italy and other sources.
The first challenge we face is to identify two separate periods that repre-
sent the two states of the world in the model. Our approach is to distinguish
and compare bank-firm relationships prior to and after the Lehman Brothers’
15
default (in September 2008), the event typically used to mark the beginning
of the global financial crisis in other studies (e.g. Schularick and Taylor,
2011).
Our unique dataset covers a significant sample of Italian banks and firms.
There are at least four advantages in focusing on Italy. First, from Italy’s
perspective the global financial crisis was largely an unexpected (exogenous)
event, which had a sizable impact especially on small and medium-sized
firms that are highly dependent on bank financing. Second, although Italian
banks have been hit by the financial crisis, systemic stability has not been
endangered and government intervention has been negligible in comparison
to other countries (Panetta et al. 2009). Third, multiple lending is a long-
standing characteristic of the bank-firm relationship in Italy (Foglia et al.
1998, Detragiache et al. 2000). And fourth, the detailed data available for
Italy allow us to test the main hypotheses of the theoretical model without
making strong assumptions. Mainly, the availability of data at the bank-firm
level on both quantity and prices allows us to overcome major identification
problems encountered by the existing bank-lending-channel literature in dis-
entangling loan demand from loan supply shifts (see e.g. Kashyap and Stein,
1995; 2000).
The visual inspection of bank lending and interest rate dynamics in Figure
3 helps us to select two periods that can be considered good and bad times:
We select the second quarter of 2007 as a good time-period when lending
reached a peak and the interest rate spread applied on credit lines levelled to
a minimum (see the green circles in panels (a) and (b) of Figure 3). We take
the bad time-period to be the first quarter of 2010, which is characterized by
a contraction in bank lending to firms and a very high intermediation spread
(see the red circles in panels (a) and (b) of Figure 3). The selection of these
two time-periods is also consistent with alternative indicators such as real
GDP and stock market capitalization (see panel (c) in Figure 3). We do not
consider the time-period beyond 2011, as it is affected by the effects of the
European Sovereign debt crisis.
Our second challenge is to distinguish between 1−banks and 1−banks.
One of the distinguishing characteristics of 1−banks in our theory and other
relationship-banking models (Boot 2000; Berger and Udell 2006) is that
1−banks gather information about the firms they lend to on an ongoing
basis, to be able to provide the flexible financing their client firms value.
Thus, the measure of relationship banking we focus on is the informational
16
distance between lenders and borrowers.
9
The empirical banking literature
has established that greater geographical distance between a bank and a firm
affects the ability of the bank to gather soft information (that is, information
that is difficult to codify), which in turn undermines the bank’s ability to
act as a relationship lender (see Berger et al. 2005, Agarwal and Hauswald
2010).
The theoretical banking literature argues that greater geographical dis-
tance plausibly increases monitoring costs and diminishes the ability of banks
to gather and communicate soft information. In particular, it is argued that
loan officers who are typically charged with gathering this kind of informa-
tion and to pass it through the bank’s hierarchical layers will face higher
costs.
10
Stein (2002) has shown that when the production of soft informa-
tion is decentralized, incentives to gather it crucially depends on the ability
of the agent to convey information to the principal. Cremer, Garicano and
Prat (2007) have also argued that distance may affect the transmission of
information within banks (i.e. the ability of branch loan officers to harden
soft information), since bank headquarters may be less able to interpret the
information they receive from distant branch loan officers than from closer
ones. They show that there is a trade-off between the efficiency of commu-
nication and the breadth of activities covered by an organization, so that
communication is more difficult when headquarters and branches are farther
apart.
We therefore divide 1−banks and 1−banks by the geographical distance
between the lending banks’ headquarters and firm headquarters, which we
take as a simple proxy for informational distance.
11
More precisely, we in-
troduce two dummy variables: for an 1−bank, the first variable is equal
to 1 if firm / is headquartered in the same province where bank , has its
headquarters; for a 1−bank, the second variable is equal to 1 when the first
variable (for the 1−bank) is equal to 0. This way a bank can act both as
9
There is not a clear consensus in the literature on the way relationship characteris-
tics are identified. In Appendix C, we have checked the robustness of the results using
alternative measures for relationship lending.
10
Soft information it is gathered through repeated interaction with the borrower and
then it requires proximity. Banks in order to save on transportation costs delegate the
production of soft information to branch loan officers since they are those within bank
organizations which are the closest to borrowers. Alternatively, one can consider the
geographical distance between bank branches and firms’ headquarters. However, Degryse
and Ongena (2005) find that this measure has little relation to informational asymmetries.
11
Accordingly, branches of foreign banks are treated as T−banks.
17
an 1−bank for a firm headquartered in the same province and as a 1−bank
for firms that are far away.
Our third challenge is to measure credit risk and to distinguish this mea-
sure from asymmetric information. One basic assumption of our theoretical
framework is that ex ante all banks know that some firms are more risky
than others. The objective measure of a firm’s credit risk shared ex ante by
all banks is given by (1 − j) in our model and by a firm’s 2−score in our
empirical analysis. The 2−score, thus, is our measure of a firm’s ex-ante
probability of default. The 2−scores can be mapped into four levels of risk:
1) safe; 2) solvent; 3) vulnerable; and 4) risky. Measuring asymmetric infor-
mation and the role of relationship banks in gathering additional information
is more complex. Obviously, no contemporaneous variable could possibly re-
flect soft information that is private to the firm and the relationship bank.
Consequently, it is only ex post that a variable could reflect the skills of re-
lationship banks in refinancing the good firms and liquidating the bad ones.
Relationship banks’ superior soft information must imply that firms who are
able to roll over their loans from a relationship bank must on average have
lower rates of default. This is why in order to distinguish H−firms from
1−firms we look at the realization of defaults.
Table 1 gives some basic information on the dataset after having dropped
outliers (for more information see the data Appendix B). The table is di-
vided horizontally into three panels: i) all firms, ii) H−firms (i.e. firms that
have not defaulted during the financial crisis) and iii) 1−firms (i.e. firms
that have defaulted on at least one of their loans). In the rows we divide
bank-firm relationships into: i) pure relationship lending: firms which have
business relationship with 1−banks only; ii) mixed banking relationship:
firms which have business relationships with both 1−banks and 1−banks;
iii) pure transactional lending: firms which have business relationship with
1−banks only.
Several clear patterns emerge. First, cases where firms have only relation-
ships with 1−banks (10% of the cases) or 1−banks (44% of the cases) are
numerous but the majority of firms borrow from both kinds of banks (46%).
Second, the percentage of defaulted firms that received lending only from
1−banks is relatively high (64% of the total). Third, in the case of pure
1−banking, or combined 11 −banking, firms experience a lower increase
in the spread in the crisis. Fourth, 1−banking is associated with a higher
level of bank equity-capital ratios, so that 1−banks have a buffer against
contingencies in bad times. Their equity-capital slack depends on the busi-
18
ness cycle and is depleted in bad times. Interestingly, the size of the average
1−bank is four times that of the average 1−bank (100 vs 25 billions). This
is in line with Stein (2002) who points out that the internal management
problem of very large intermediaries may induce these banks to rely solely
on hard information in order to align the incentives of the local managers
with headquarters.
These patterns are broadly in line with the predictions of our theoretical
model. However, these findings can only be suggestive as the bank-lending
relationship is influenced not only by firms’ types but also by other factors
(sectors of a firm’s activity, the firm’s age and location, bank-specific charac-
teristics, etc.), which we have not yet controlled for in the descriptive sample
statistics reported in Table 1.
5.1 Hypothesis 1: 1−banks have better information
than 1−banks about firms’ credit risk
To verify whether 1−banks are better able to learn firms’ types than 1−banks
we look at the relationship between the probability that a firm / defaults
and the firm’s relative share of transactional vs relationship financing. If
1−banks have superior information than 1−banks in a crisis then the rate
of default of firms financed through transaction loans will be higher than for
firms financed by 1−banks.
Our baseline cross-sectional equation estimates the marginal probability
of default of firm / in the six quarters that follow the Lehman Brothers
collapse (2008:q3-2010:q1) as a function of the share of loans of firm / from a
1−bank in 2008:q2. In particular, we estimate the following marginal probit
model:
`1(Firm k’s default=1) = c +¸ +:(1 −:/c:c)
I
+
I
(11)
where c and ¸ are, respectively, vectors of bank and industry-fixed effects
and (1 −:/c:c)
I
is the pre-crisis proportion of transactional loans (in value)
for firm /. The results reported in Table 2 indicate that a firm with more
1−bank loans has a higher probability of default.
12
This marginal effect
12
In principle the reliability of this test may be biased by the possible presence of
“evergreening”, a practice aimed at postponing the reporting of losses on the balance
sheet. Albertazzi and Marchetti (2010) find some evidence of “evergreening” practices
in Italy in the period 2008:Q3-2009:Q1, although limited to small banks. We think that
19
increases with the share of 1−bank financing and reaches a maximum of
around 0.3% when (1 − :/c:c)
I
is equal to 1. This effect is not only sta-
tistically significant but also important from an economic point of view, as
the average default rate for the whole sample in the period of investigation
was around 1%. This finding is robust to enriching the set of controls with
additional firm-specific characteristics (see panel II in Table 2) or to calcu-
lating the proportion of transactional loans in terms of the number of banks
that finance firm / instead of by the size of outstanding loans (see panel III
in Table 2).
5.2 Hypotheses 2: 2a) 1−banks charge higher rates
in good times and lower rates in bad times. 2b)
1−banks increase their supply of lending (relative
to 1−banks) in bad times.
In the second step of our analysis we investigate bank lending and price set-
ting over the business cycle. Our focus on multiple lending relations at the
firm level allows us to solve potential identification issues, by including both
bank and firmfixed effects in the econometric model. In particular, the inclu-
sion of fixed effects allows us to control for all (observable and unobservable)
time-invariant bank and borrower characteristics, and to identify in a precise
way the effects of bank-firm relationships on the interest rate charged and
the loan amount.
We estimate two cross-sectional equations: one for the interest rate (:
),I
)
applied by bank , on the credit line of firm /, and the other for the logarithm
evergreening is less of a concern in our case for three reasons.
First, evergreening is a process that by nature cannot postpone the reporting of losses
for a too long time. In our paper, we consider the period 2008:Q3-2010:Q1 that is 18
months after Lehmann’s default and therefore there is a higher probability that banks
have reported losses.
Second, there is no theoretical background to argue that evergreening can explain the
difference we document between T-banks and 1-banks. Both kinds of banks may have
a similar incentive to postpone the reporting of losses to temporarily inflate stock prices
and profitability.
Third, in the case that 1-banks have more incentive to evergreen loans the definition of
default used in the paper limits the problem. In particular, we consider a firm as in default
when at least one of the loans extended is reported to the credit register as a defaulted
one (“the flag is up when at least one bank reports the client as bad”). This means that
a 1-bank cannot effectively postpone the loss simply because a T-banks will report it.
20
of outstanding loans by bank , in real terms (1
),I
) on total credit lines to
firm /:
:
),I
= i +, +¸1-bank
),I
+
),I
. (12)
1
),I
= o +c +j1-bank
),I
+
),I
. (13)
where i and o are bank-fixed effects and , and c are firm-fixed effects.
13
Both
equations are estimated over good times (2007:q2) and bad times (2010:q1).
The results are reported in Table 3.
14
In line with the predictions of the
model, the coefficients show that 1−banks (compared to 1−banks) provide
loans at a cheaper rate in good times and at a higher rate in bad times (see
columns I and II). The difference between the two coefficients ¸
1
− ¸
G
=
.123 − (−.081) = .204
∗∗∗
is statistically significant. As for loan quantities,
other things being equal, 1−banks always provide on average a lower amount
of lending, especially in bad times (see columns III and IV). In this case
the difference j
G
− j
1
= −.313 − (−.275) = −0.038
∗∗
indicates that, other
things being equal, 1−banks increase their supply of loans in bad times. In
particular, they supply 4% more loans relatively to 1−banks.
13
It is worth stressing that the analysis of interest rates applied on credit lines is partic-
ularly useful for our purposes for two reasons. First, these loans are highly standardized
among banks and therefore comparing the cost of credit among firms is not affected by
unobservable (to the econometrician) loan-contract-specific covenants. Second, overdraft
facilities are loans granted neither for some specific purpose, as is the case for mortgages,
nor on the basis of a specific transaction, as is the case for advances against trade credit
receivables. As a consequence, according to Berger and Udell (1995) the pricing of these
loans is highly associated with the borrower-lender relationship, thus providing us with a
better tool for testing the role of lending relationships in bank interest rate setting.
14
Following Albertazzi and Marchetti (2010) and Hale and Santos (2009) we cluster
standard errors (-

) at the firm level in those regressions that include bank fixed effects.
Vice versa in those regressions that include specific firm fixed effects (but no bank fixed
effects) we cluster standard errors at the bank group level. In this way we are able to
control for the fact that, due to the presence of an internal capital market, probably
financial conditions of each bank in the group is not independent of one another. For a
general discussion on different approaches used to estimating standard errors in finance
panel data sets, see Petersen (2009).
21
5.3 Hypothesis 3: Safe firms prefer transactional lend-
ing; other firms prefer to combine transactional
and relationship banking.
A key prediction of our model is that firms with low underlying cash-flow
risk (those with a probability of success in bad times that is greater than ˆ j
1
)
prefer pure transaction banking, while those with higher cash-flow risk (with
j
1
≤ ˆ j
1
) prefer to combine transaction and relationship banking. To test
this prediction we will look for a 2−score relation such that firms with a low
2 score reveal their preference for pure transactional banking and those with
a high 2 score reveal their preference for combined 1 and 1−banking. To
this end, equations (12) and (13) are further enriched with interaction terms
between bank-types and the 2−score in order to explore whether 1−banks
and 1−banks behave differently with respect to borrowers with a different
degree of risk:
:
),I
= i+o+¸(1−bank)
),I

Z
(1−bank)
),I
∗2+j
Z
(1−bank)
),I
∗2+ΘA+
),I
(14)
1
),I
= o+o+j1−bank
),I
+j
Z
(1−bank)
),I
∗2+·
Z
(1−bank)
),I
∗2+ΦA+
),I
(15)
In the above equations we can include only bank fixed effects, as the
interaction terms between bank type and 2−scores (a linear combination
that is invariant for each firm) prevent us from including firm-fixed effects.
For this reason we also enrich the set of controls by including a complete set of
industry-province dummies (o) and a vector A with a number of firm-specific
characteristics. In particular A now contains:
• a dummy USGR that takes the value of 1 for those firms that have
used their credit lines for an amount greater than the value granted by
the bank, and zero elsewhere;
• a dummy that takes the value of 1 if the firm is a limited liability
corporation, and zero elsewhere (LTD);
• a dummy that takes the value of 1 for firms with less than 20 employees
(SMALL_FIRM), and zero elsewhere; this dummy aims to control for
the fact that small firms do not issue bonds as larger firms may do;
22
• the length of the borrower’s credit history (CREDIT HISTORY) mea-
sured by the number of years elapsed since the first time a borrower
was reported to the Credit Register. This variable tells us how much
information has been shared among lenders through the Credit Register
over time and is a proxy for firms’ reputation acquisition.
The results are reported in Table 4. Firms that use their credit lines
for an amount greater than the value granted by the bank have to pay a
higher spread that increases in bad times. Repeated interaction with the
banking system also has an effect on bank interest rate setting and loan
supply. The variable CREDIT_HISTORY, representing the number of years
elapsed since the first time a borrower was reported to the Credit Register, is
negatively (positively) correlated with rates applied to credit lines (amount
of outstanding loans). Firms organized as limited liability corporations (LTD
corporations) are less opaque and pay a lower spread. Other things being
equals, LTD corporations also need less bank lending because they have
access to other sources of funds.
The graphical representation of the interaction terms between bank-types
and the 2−score is reported in Figure 4. The upper panels (a) and (b)
describes the effects on the interest rate, the bottom panels (c) and (d) those
on the logarithm of real loans. The graphs on the left illustrate the pre-
Lehman period, while those on the right represent the post-Lehman period.
In each graph the horizontal axis reports the 2−score, where 2 goes from
1 (safe firm) to 4 (risky firm). Transaction banking (1−banks) is indicated
with a dotted line and relationship banking (1−banks) with a solid line.
The visual inspection of all graphs shows that both interest rates and
loan size are positively correlated with the 2−score. The positive correlation
between risk and bank financing probably reflects the fact that risky firms
have a limited access to market financing. As one would expect, the interest
rate increases with credit risk.
In line with the predictions of our model, the cost of credit of transactional
lending is always lower than relationship banking in good times: the dotted
line is always below the solid one for all 2−scores (see panel (a) of Figure
4). This pattern is reversed in bad times (panel (b)) when banks with a
strong lending relationship (1−banks) offer lower rates to :i:/¸ firms (those
with a 2−score greater than 1). And, as predicted by our model, it is always
cheaper for safe firms to use transactional banking because they obtain always
a lower rate from 1−banks. Moreover the two bottom panels of Figure 4
23
highlight that the roll-over effects of 1−banks on lending is mostly present
for risky firms, while :c,c firms always obtain a greater level of financing
from 1−banks whether in good or bad times (the dotted line is always above
the solid line for 2 = 1 both in panel (c) and panel (d)).
5.4 Hypothesis 4: 1−banks need capital buffers to be
used to preserve the lending relationship in bad
times
A final prediction of our model is that 1−banks have a higher equity capital
buffer than 1−banks in good times so as to support the lending relationship
in bad times. To test this prediction we focus on bank capital endowments:
Since 1−banks have a lower incentive of making additional loans to firms
in distress in bad times, we should observe that these banks hold a lower
equity-capital buffer against contingencies relative to 1−banks prior to the
crisis. In particular, we estimate the following cross-sectional equation on
our sample of 179 banks:
C¹1
)
= . +t(1 −:/c:c)
)
+Ψ1 +Φ2 +
)
. (16)
where the dependent variable C¹1
)
is the regulatory capital-to-risk-weighted-
assets of bank j in 2008:q2 (prior to the Lehman collapse), the variable
(1 −:/c:c)
)
is the proportion of transaction loans (in value) for bank j, . is
a set of bank-zone dummies, 1 a set of bank-specific controls, and 2 a set of
bank credit portfolio-specific controls. Bank specific characteristics include
not only bank size and liquidity ratio (liquid assets over total assets), but also
the retail ratio between deposits and total bank funding (excluding capital).
All explanatory variables are taken in 2008:q1 in order to mitigate endogene-
ity problems. The results reported in Table 6 indicate that, indipendently
of the model specification chosen, a pure 1−bank that has a credit portfolio
composed exclusively of transaction loans (1 − :/c:c
)
= 1) have a capi-
tal buffer more than 3 percentage points lower than a pure 1−bank, whose
portfolio is composed exclusively of relationship loans (1 −:/c:c
)
= 0).
Finally, we also test the effects of bank capital endowments on interest
rates and lending. We thus include in our baseline equations (12) and (13),
the regulatory capital-to-risk weighted assets ratio (C¹1, lagged one period
to mitigate endogeneity problems), a set of bank-zone dummies (.), and other
bank-specific controls (1 ):
24
:
),I
= , +. +¸(1 −bank)
),I
+iC¹1
)
+Ψ1 +
),I
(17)
1
),I
= c +. +j(1 −bank)
),I
+`C¹1
)
+Ξ1 +
),I
(18)
The vector 1 contains in particular the dummy lo G1, described above,
and:
• a dummy for mutual banks (`l1l¹1), which are subject to a special
regulatory regime (Angelini et al., 1998);
• a dummy equal to 1 if a bank belongs to a group and 0 elsewhere;
• a dummy equal to 1 if a bank has received government assistance and
0 elsewhere.
The results reported in Table 5 indicate that banks with larger capital
ratios are better able to protect the lending relationship with their clients.
Well-capitalized banks have a higher capacity to insulate their credit portfolio
from the effects of an economic downturn by granting a higher amount of
lending at a lower interest rate. To get a sense of the economic impact of
the above-mentioned results, during a downturn a bank with a capital ratio 5
percentage points greater with respect to another one supplies 5% more loans
at an interest rate 20 basis points lower. This result on the effects of bank
capital is in line with the bank lending channel literature which indicates that
well-capitalized banks are better able to protect their clients in the event of a
monetary policy shock (Kishan and Opiela, 2000; Gambacorta and Mistrulli,
2004).
Interestingly, the positive effect of bank capital in protecting the lending
relationship is more important for 1−banks than for 1−banks. This can be
tested by replacing iC¹1 in equation (17) with
·
T
(1 −/c:/) ∗ C¹1 +·
1
(1 −/c:/) ∗ C¹1
and `C¹1 in equation (18) with
`
T
(1 −/c:/) ∗ C¹1 +`
1
(1 −/c:/) ∗ C¹1.
In particular, the coefficients ·
T
and ·
1
take the values of -0.054*** (s.e.
0.008) and -0.038*** (s.e. 0.010), respectively, and are statistically different.
25
A similar result is obtained in the lending equation, where `
T
and `
1
take
the values of -0.025*** (s.e. 0.005) and -0.006* (s.e. 0.003) respectively,
and are statistically different from one another. This means that during
a downturn an 1−bank (resp. 1−bank) with a capital ratio 5 percentage
points greater than another 1−bank supplies 12% more loans at an interest
rate 27 basis points lower (resp. 3% more loans and 19 basis points lower
rates for a 1−bank).
5.5 Robustness checks
We have checked the robustness of our results in several ways.
15
We have:
(1) included in the baseline regressions an additional measure of relationship
banking, namely a dummy for the “main bank”; (2) tested for alternative
definitions of the relationship dummy 1−bank; (3) considered all foreign
banks as 1−banks; (4) estimated equations on a subset of “new firms”. In
all cases results are very similar.
One distinctive feature of our dataset is that, by focusing on multiple
lending, we can run estimates with both bank and firm fixed effects, thus
controlling for observable and unobservable supply and demand factors. In
this way we are able to clearly identify the effects of bank-firm relationship
characteristics on lending, not biased by the omission of some variables that
may affect credit conditions. To highlight this point we have re-run all the
models without bank and firm fixed effects. The new set of results (not
reported for the sake of brevity but available from the authors upon request)
indicates that 1−bank coefficients are often different and may even change
sign in one third of the cases. In particular, when we do not introduce
fixed-effects, 1−banks are shown to supply relatively more lending but at
higher prices. This is an important observation, as it clearly shows that not
controlling for all unobservable bank and firm characteristics biases results;
in particular, the benefits of relationship lending tend to be overestimated
on prices and underestimated on quantities.
The bias can be seen by comparing Figure 4 (illustrating the results of
the models with fixed effects reported in Table 4) with Figure 5 (illustrating
results of the same models but without fixed effects). In Figure 5 the dot-
ted line for 1−banks moves upwards relative to Figure 4. In other words,
1−banks supply relatively more loans and charge higher interest rates when
15
For more details see Appendix C.
26
fixed effects are dropped compared with the case when they are added to the
estimated equation.
This last finding is consistent with the way we identify transaction and
relationship banking, as one would expect to see this sign for the bias if
1−banks are better able than 1−banks to gather soft information, and con-
sequently better able to discriminate good and bad borrowers. Indeed, con-
sider two firms that have the same 2−score but one is, in reality, riskier than
the other. According to our model, 1−banks are better able to discriminate
between the two while 1−banks are not. This happens because 1−banks
use only hard information (incorporated in the 2−scores) while 1−banks
rely on both hard and soft information. If this is true then the riskiest firm
would prefer to ask 1−banks for a loan since these banks are less able to
distinguish good from bad borrowers. As a consequence, the riskiest firm
will in theory get better price conditions and a larger amount of credit com-
pared to the situation where 1−banks are able to evaluate firms’ credit risk
correctly. Of course, 1−banks are perfectly aware that the bank-firm match-
ing is not random and that their applicant pool is on average riskier than
that of 1−banks. As a consequence, 1−banks will charge higher interest
rates, anticipating that they will tend to make more mistakes in their loan
restructuring choices compared to 1−banks. In other words, 1−banks know
that they will tend to lend “too much” and this is exactly what we observe
in Figure 5, where we are not controlling for this endogenous matching. In
contrast, when we use fixed effects we can control for the fact that bank-firm
matching is not random by comparing 1−banks’ and 1−banks’ behavior
keeping constant and homogenous the level of default risk between banks’
types. It is only in this last situation that we are able to compare 1−banks
with 1−banks perfectly, since then the interest rate spread between these
two types of banks (and their different lending behavior) only reflects their
different roles in the credit market. In sum, the interest spread between
1−banks and 1−banks in good times reported in Figure 4 (using fixed ef-
fects) is an unbiased measure of the premium that firms pay in order to get
a loan restructuring in bad times.
27
6 Comparing different theories of relation-
ship banking
The relationship banking literature distinguishes between different benefits
from a long-term banking relation. Except for Berlin and Mester (1999)
the other theories do not explicitly consider how relationship lending would
evolve over the business cycle. Nevertheless it is instructive to briefly compare
our findings with the likely predictions of the other main theories.
We have identified four different strands of relationship banking theories,
which differ in their predictions of default rates, cost of credit, and credit
availability over the business cycle. A first strand emphasizes the role of
1−Banks in providing (implicit) insurance to firms towards future access to
credit and future credit terms (Berger and Udell, 1992; Berlin and Mester
1999). According to this (implicit) insurance theory, 1−banks do not have
better knowledge about firms’ types and therefore they should experience
similar default rates (in crisis times) to those of 1−banks. Although Berlin
and Mester find that banks funded more heavily with core deposits provide
more loan-rate smoothing in response to exogenous changes in aggregate, it
does not follow from this finding that the firms with the lowest credit risk
choose this loan-rate smoothing service.
A second strand underscores the monitoring role of 1−banks (Holmstrom
and Tirole 1997, Boot and Thakor 2000, Hauswald and Marquez 2000). Ac-
cording to the monitoring theory, only firms with low equity capital choose
a monitored bank loan from an 1−bank, while firms with sufficient cash
(or collateral) choose cheaper loans from a 1−bank. By this theory adverse
selection is a minor issue, and monitoring is simply a way to limit the firm’s
interim moral hazard problems. Although these monitoring theories do not
make any explict predictions on default rates in a crisis, it seems plausible
that these theories would predict higher probabilities of default in bad times
for firms borrowing from 1−banks.
A third strand plays up the greater ex-ante screening abilities (of new
loan applications) of 1-banks due to their access to both hard and soft in-
formation about the firm (Agarwal and Hauswald 2010, Puri et al. 2010).
A plausible prediction of these ex-ante screening theories would seem to be
that 1−banks have lower default rates in crisis times than 1−banks. An-
other plausible prediction is that 1−banks would benefit from an ex-post
monopoly of information both in good and bad times, thus charging higher
28
lending rates than 1−banks in both states on the loans they roll over.
A fourth strand of relationship banking theories, on which our model
builds, emphasizes (soft) information acquisition about borrowers’ types over
time. This role is closer to the one emphasized in the original contributions by
Sharpe (1990), Rajan(1992) and Von Thadden (1995). This strand of theories
puts the 1−bank in the position of offering continuation lending terms that
are better adapted to the specific circumstances in which the firm may find
itself in the future. This line of theories predicts that 1−banks charge higher
lending rates in good times on the loans they roll over, and lower rates in
bad times to help their best clients through the crisis. In contrast, 1−banks
offer cheaper loans in good times but roll over fewer loans in bad times. Also,
according to this theory we should observe lower delinquency rates in bad
times for 1−banks that roll over their loans.
As a first step in the comparison among these different theoretical models,
we focus on the relationship between the probability for a firm / to go into
default and the composition of its transactional vs relationship financing.
From our test of Proposition 1 (see equation 11) we find that 1−banks
exhibit higher default rates in bad times. This finding is consistent with the
predictions of our theory as well the third strand of theories based on ex-ante
screening.
The comparison of interest rates of 1−banks and 1−banks in good times
and in bad times provides additional insights into the likely benefits of re-
lationship banking. In particular, our findings that 1−banks charge higher
rates than 1−banks in good times and vice-versa in bad times are only con-
sistent with the prediction of our theory. Importantly, we do not observe an
ex-post monopoly of information for 1−banks such that 1−banks always
charge higher rates than 1−banks on the loans they roll over.
7 Conclusion
The theoretical approach we suggest, which emphasizes the idea that rela-
tionship lending allows banks to learn firms’ types and therefore help them
in bad types, provides predictions on relative rates of default in a crisis,
the behavior of interest rates, and the amount of equity capital of relation-
ship banks that the our data broadly supports. Our empirical analysis thus
provides further guidance on what relationship-lending achieves in the real
economy. We have found that relationship banking is an important mitigat-
29
ing factor of crises. By helping profitable firms to retain access to credit in
times of crisis relationship banks dampen the effects of a credit crunch. How-
ever, the role relationship banks can play in a crisis is limited by the amount
of excess equity capital they are able to hold in anticipation of a crisis. Banks
entering the crisis with a larger equity capital cushion are able to perform
their relationship banking role more effectively. These results are consistent
with other empirical findings for Italy (see, amongst others, Albertazzi and
Marchetti (2010) and Gobbi and Sette (2012)).
Our analysis suggests that if more firms could be induced to seek a long-
term banking relation, and if relationship banks could be induced to hold a
bigger equity capital buffer in anticipation of a crisis, the effects of crises on
corporate investment and economic activity would be smaller. However, ag-
gressive competition by less well capitalized and lower-cost transaction banks
is undermining access to relationship banking. As these banks compete more
aggressively more firms will switch away from 1−banks and take a chance
that they will not be exposed to a crisis. And the more firms switch the
higher the costs of 1−banks. Overall, the fiercer competition by 1−banks
contributes to magnifying the amplitude of the business cycle and the pro-
cyclical effects of bank capital regulations.
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Appendix A. Mathematical proofs
Proof of Proposition 1
We shall characterize the equilibrium lending terms and loan refinancing
using backwards induction. These lending terms and roll-over decisions will
depend on whether we are considering a safe firm for which condition (3)
holds (j ≥ b j) or a risky firm (j < b j).
• If the project is successful, firms are able to repay their loan out of
their cash flow \
1
. This occurs with probability j
S
. In this case the
firm continues to period 2 and gets \
1
if it is an H−firm.
• If the project fails at time t = 1, firms with j ≥ b j will be able to roll
over their debts. Their debt will then be rolled over against a promised
repayment of :
S
T
(j
S
) that reflects state of nature o. When with j ≥ b j,
H−firms are able to make sufficiently high promised expected repay-
ments i
1
:
1
T
(j
1
) even in the recession state, so that for these firms we
have :
T
(j) given by the break-even condition:
:
T
(j) = 1 +j
T
.
• If, instead j < b j, liquidation occurs in state 1 if the firm is not suc-
cessful, which happens with probability o(1 − j
1
). The gross interest
rate :
T
(j) is then given by the break even condition:
[j + (1 −o)(1 −j
G
)] :
T
(j) +o(1 −j
1
)\
1
= 1 +j
T
.
Proof of Proposition 2
H−firms are then able to secure new lending at gross interest rate :
1
1
=
,\
1
in both recession and boom states. Under these conditions, the first
period gross interest rate :
1
(j) is given by the break-even condition:
j:
1
(j) + (1 −j)[i(1 −:),\
1
+ (1 −i)\
1
] = 1 +j
1
.
where
16
i ≡
(1 −o)(1 −j
G
)i
G
+o(1 −j
1
)i
1
(1 −j)
16
We assume again that the intermediation cost of dealing with an 1−bank is entirely
‘capitalized’ in period 0.
35
Proof of Proposition 3
If 1−banks have no incentive to roll over the firm’s joint debts of H−firms,
then the benefits of combining the two types of debt are lost and the firm
would be better off with 100% 1−bank financing. Consequently, the combi-
nations of the two types of debt, 1
1
and 1
T
. is of interest only in so far as
the 1−bank has an incentive to use its information to restructure the debts
of unsuccessful H−firms.
This means that combining both types of debts only makes sense if the
following constraint is satisfied:
,\
1
(1 −:) −:
1T
T
1
T
≥ 1
1
\
1
. (19)
The LHS represents what the 1−bank obtains by rolling over all the period
t = 1 debts of an unsuccessful H−firm. When there is a combination of
1−debt and 1−debt, a roll-over requires not only that the 1−bank extends
a new loan to allow the firm to repay :
1T
1
at t = 1, but also that it extends a
loan to allow the firm to repay :
1T
T
to the 1−bank. As a result, the 1−bank
can hope to get only ,\
1
(1 − :) − :
1T
T
1
T
by rolling over an unsuccessful
H−firm’s debts. This amount must be greater than what the 1−bank can
get by liquidating the firm at t = 1. namely 1
1
\
1
.
1−banks know that if they are lending to an H−firm their claim will
be paid back by the 1−bank, provided the above condition (19) is met. So
they will obtain the par value, :
1T
T
for sure if they lend to an H−firm and a
fraction 1
T
of the residual value \
1
if, instead the firm is an 1−firm. The
corresponding rate is therefore:
:
1T
T
=
(1 +j
T
) −(1 −j)(1 −i)\
1
j + (1 −j)i
. (20)
As intuition suggests, constraint (19) holds only if the amount of 1−bank
debt the firm takes on is below some threshold. To establish this, note that
replacing 1
1
= 1 −1
T
condition (19) can be rewritten as:
,(1 −:)\
1
−\
1
≥ 1
T
(:
1T
T
−\
1
). (21)
Substituting for :
1T
T
we obtain that the following maximum amount of
transaction lending is consistent with efficient restructuring:
1
T

(1 +j
T
) −(1 −j)(1 −i)\
1
j + (1 −j)i
−\
1
¸
≤ ,\
1
(1 −:) −\
1
. (22)
36
which simplifies to:
1
T

(1 +j
T
) −\
1
j + (1 −j)i
¸
≤ ,\
1
(1 −:) −\
1
(23)
Implying that:
1
T

(j + (1 −j)i)
£
,\
1
(1 −:) −\
1
¤
1 +j
T
−\
1
.
As the firm optimally chooses the amounts 1
T
and 1
1
. it will choose the
combination that maximizes Π
1T
, which is equivalent to minimizing the total
funding cost c
c = j :
1T
1
(j)(1 −1
T
) +j :
1T
T
1
T
under the constraint (19) that guarantees that the 1−bank has an incentive
to restructure H−firms.
The expression for c can be simplified by using the break even constraint
for the 1−bank, which is given by:
j :
1T
1
(1 −1
T
) + (24)
(1 −j)
£
i((1 −:),\
1
−:
1T
T
1
T
) + (1 −i)(1 −1
T
)\
1
¤
= (1 +j
1
)(1 −1
T
)
or,
j :
1T
1
(1 −1
T
) =
(1 +j
1
)(1 −1
T
) −(1 −j)
£
i((1 −:),\
1
−:
1T
T
1
T
) + (1 −i)(1 −1
T
)\
1
¤
Collecting terms in 1
T
on the right hand side we then get:
j :
1T
1
(1 −1
T
) =
1
T
[−(1 +j
1
) + (1 −j)(i:
1T
T
+ (1 −i)\
1
)] + (1 +j
1
) (25)
−(1 −j)
£
i(1 −:),\
1
+ (1 −i)\
1
¤
Replacing j:
1T
1
(1−1
T
) by its value in (25) and ignoring constant factors
we thus obtain the equivalent funding cost minimization problem :
min
1

[−(1 +j
1
) + ((1 −j)i +j):
1T
T
+ (1 −j)(1 −i)\
1
)]1
T
37
But notice that the coefficient
[−(1 +j
1
) + ((1 −j)i +j):
1T
T
+ (1 −j)(1 −i)\
1
)] 0
as :
1T
T
satisfies
((1 −j)i +j):
1T
T
+ (1 −j)(1 −i)\
1
= 1 +j
T
and j
1
j
T
.
Consequently the condition (19) is always binding. This allows to replace
1
T
in (24) leading to:
j:
1T
1
(1 −1
T
) + (1 −j)\
1
= (1 +j
1
)(1 −1
T
) (26)
thus obtaining the expression for :
1T
1
.
Proof of Proposition 4
Let ∆Π = Π
T
− Π
1T
denote the difference in expected payoffs for an
H−firm from choosing 100% 1−financing over mixed financing, where
Π
T
= j(2\
1
−:
T
(j)) +(1−o)(1−j
G
)(\
1

:
T
(j)
i
G
) +o(1−j
1
)(\
1

:
T
(j)
i
1
)
for j ≥ b j, where :
T
(j) = 1 +j
T
and
Π
T
= j(2\
1
−:
T
(j)) + (1 −o)(1 −j
G
)(\
1

:
T
(j)
i
G
)
for j < b j, where
:
T
(j) =
1 +j
T
−o(1 −j
1
)\
1
oj
1
+ 1 −o
and,
Π
1T
= j(2\
1
−:
1T
1
(j)(1 −1
T
) −:
1T
T
(j)1
T
) + (1 −j)(1 −,)\
1
• Consider first the case j ≥ b j
Combining these expressions ∆Π can be written as follows:
∆Π(j) = j(:
1T
1
(j)(1 −1
T
) +:
1T
T
(j)1
T
−:
T
(j)) (27)
+(1 −o)(1 −j
G
)[,\
1

:
T
(j)
i
G
] +
+o(1 −j
1
)(,\
1

:
T
(j)
i
1
)
38
The first term,
j(:
1T
1
(1 −1
T
) +:
1T
T
(j)1
T
) −:
T
(j)).
reflects the difference in the costs of funding when the firm is successful,
which occurs with probability j. The other terms measure the difference for
a non successful firm between the benefits of relationship banking and those
of transactional banking.
To simplify the expression for ∆Π(j) let
Σ ≡ j[:
1T
1
(j)(1 −1
T
) +:
1T
T
(j)1
T
]
From the break even condition (24) we then obtain that
Σ = (1 +j
1
)(1 −1
T
) + (1 −j)i :
1T
T
(j)1
T
+j :
1T
T
(j)1
T
−(1 −j)
£
i(1 −:),\
1
+ (1 −i)(1 −1
T
)\
1
¤
Substituting for
:
1T
T
=
(1 +j
T
) −(1 −j)(1 −i)\
1
j + (1 −j)i
the above expression simplifies to:
Σ = (1+j
1
)−(j
1
−j
T
)1
T
−(1−j)
£
i(1 −:),\
1
+ (1 −i)(1 −1
T
)\
1
¤
−(1−j)(1−i)1
T
\
1
(28)
Substituting for Σ in ∆Π(j) we obtain:
∆Π(j) = Σ −j :
T
(j) + (1 −o)(1 −j
G
)[(1 −,)\
1

:
T
(j)
i
G
] +
o(1 −j
1
)

,)\
1

:
T
(j)
i
1
¸
we obtain:
39
∆Π(j) = (1 +j
1
) −(j
1
−j
T
)1

T
− (29)
(1 −j)
£
i(1 −:),\
1
+ (1 −i)\
1
¤
−j(1 +j
T
) + (1 −j),\
1
−(1 +j
T
)[
(1 −o)(1 −j
G
)
i
G
+
o(1 −j
1
)
i
1
]
Differentiating with respect to j
1
and noting that
dj
G
dj
1
=
dj
dj
1
= 1
and that:
d1

T
dj
=
(1 −i)
£
,\
1
(1 −:) −\
1
¤
1 +j
T
d∆Π(j)
dj
1
= −(j
1
−j
T
)
d1

T
dj
1

d(1 −j)i
dj
1
£
(1 −:),\
1
−\
1
¤
(30)
+\
1
−(1 +j
T
) −,
A
\
1
+(1 +j
T
)[
(1 −o)
i
G
+
o
i
1
]
Using
d(1 −j)i
dj
1
= −[(1 −o)i
G
+oi
1
]
and
d1

T
dj
1
=
£
(1 −:),\
1
−\
1
¤
1 +j
T
(1 −[(1 −o)i
G
+oi
1
])
we further obtain:
40
d∆Π(j)
dj
1
= −(j
1
−j
T
)
£
(1 −:),\
1
−\
1
¤
1 +j
T
(1 −[(1 −o)i
G
+oi
1
])(31)
+[(1 −o)i
G
+oi
1
]
£
(1 −:),\
1
−\
1
¤
+\
1
−(1 +j
T
) −,\
1
+(1 +j
T
)[
(1 −o)
i
G
+
o
i
1
]
Or, equivalently,
d∆Π(j)
dj
1
= −(j
1
−j
T
)
£
(1 −:),\
1
−\
1
¤
1 +j
T
(1 −[(1 −o)i
G
+oi
1
])(32)
−[(1 −o)i
G
+oi
1
] :,\
1
−(,\
1
−\
1
)(1 −[(1 −o)i
G
+oi
1
])
+(1 +j
T
)[
(1 −o)
i
G
+
o
i
1
−1]
Now, under assumption A1 the first two terms are negligeable, while
under assumption A2 the last two terms are positive, leading to
o∆Π(j)
oj

0 .
• Next, consider the case j < b j.
Proceeding as before, ∆Π can be written as follows:
∆Π(j) = j(:
1T
1
(j)(1 −1
T
) +:
1T
T
(j)1
T
−:
T
(j)) (33)
+(1 −o)(1 −j
G
)[,\
1

:
T
(j)
i
G
] +
−o(1 −j
1
)(1 −,)\
1
We will simply show that A1 and A2 are sufficient conditions for ∆Π(j) <
0
41
The first term,
j(:
1
(j)(1 −1
T
) +:
1T
T
(j)1
T
) −:
T
(j)).
reflects the difference in the costs of repaying the loan when the firm is suc-
cessful, which occurs with probability j. The other terms measure the dif-
ference for a non successful firm between the benefits of relationship banking
and those of transactional banking.
To simplify the expression for ∆Π(j) let
Σ ≡ j[:
1T
1
(j)(1 −1
T
) +:
1T
T
(j)1
T
]
From the break even condition (24) we then obtain that
Σ = (1 +j
1
)(1 −1
T
) + (1 −j)i:
1T
T
(j)1
T
+j :
1T
T
(j)1
T
−(1 −j)
£
i(1 −:),\
1
+ (1 −i)(1 −1
T
)\
1
¤
Substituting for
:
1T
T
=
(1 +j
T
) −(1 −j)(1 −i)\
1
j + (1 −j)i
the above expression simplifies to:
Σ = (1 +j
1
) −(j
1
−j
T
)1
T
−(1 −j)
£
i(1 −:),\
1
+ (1 −i)\
1
¤
(34)
Substituting for Σ in ∆Π(j) we obtain:
∆Π(j) = Σ −j :
T
(j) + (1 −o)(1 −j
G
)[(,\
1

:
T
(j)
i
G
] +
−o(1 −j
1
)
£
(1 −,)\
1
¤
As i
G
< 1. the expression j :
T
(j)+(1−o)(1−j
G
)
v

(j)
i

has a lower bound
Γ = :
T
(j) [j + (1 −o)(1 −j
G
)]
but j + (1 −o)(1 −j
G
) = oj
1
+ 1 −o. so that replacing :
T
(j) we obtain
Γ = 1 +j
T
−o(1 −j
1
)\
1
42
As a consequence, we obtain
∆Π(j) < Σ −Γ + (1 −o)(1 −j
G
),\
1
+
−o(1 −j
1
)
£
(1 −,)\
1
¤
which after replacement of Σ and Γ leads to
∆Π(j) < (j
1
−j
T
)(1 −1

T
) (35)
−(1 −j)
£
i(1 −:),\
1
+ (1 −i)\
1
¤
+ (1 −j),\
1
+o(1 −j
1
)\
1
−o(1 −j
1
)\
1
Rearranging terms this expression becomes:
∆Π(j) < (j
1
−j
T
)(1 −1

T
) + (1 −j):,\
1
(36)
−(1 −j)
£
i,\
1
+ (1 −i)\
1
¤
+ (1 −j),\
1
−o(1 −j
1
)(\
1
−\
1
)
that is
∆Π(j) < (j
1
−j
T
)(1 −1

T
) + (1 −j):,\
1
(37)
+(1 −j)(1 −i)
£
,\
1
−\
1
¤
−o(1 −j
1
)(\
1
−\
1
)
Under A1 the first two terms are small. Under A2
£
,\
1
−\
1
¤
is also
small so that the last term dominates and ∆Π(j) < 0.
43
Appendix B. Technical details regarding the
data
We construct the database by matching four different sources.
i) The Credit Register (CR) containing detailed information on all
loan contracts granted to each borrower (i.e. the amount lent, the type of
loan contract, the tax code of the borrower).
ii) The Bank of Italy Loan Interest Rate Survey, including information
on interest rates charged on each loan reported to the CR and granted by
a sample of more than 200 Italian banks; this sample accounts for more
than 80% of loans to non-financial firms and is highly representative of the
universe of Italian banks in terms of bank size, category and location. We
investigate overdraft facilities (credit lines) for three main reasons. First,
this kind of lending represents the main liquidity management tool for firms
— especially the small ones (with fewer than 20 employees) that are prevalent
in Italy — which cannot afford more sophisticated instruments. Second, since
these loans are highly standardized among banks, comparing the cost of
credit among firms is not affected by unobservable (to the econometrician)
loan-contract-specific covenants. Third, overdraft facilities are loans granted
neither for some specific purpose, as is the case for mortgages, nor on the
basis of a specific transaction, as is the case for advances against trade credit
receivables (Berger and Udell, 1995).
iii) The Supervisory Reports of the Bank of Italy, from which we ob-
tain the bank-specific characteristics (size, liquidity, capitalization, funding
structure). Importantly, for all the banks in the sample, we obtain informa-
tion on the credit concentration of the local credit market in June 2008. We
compute Herfindahl indexes for each province (similar to counties in the US)
using the data on loans granted by banks.
iv) The CERVED database, which includes balance sheet information
on about 500,000 companies, mostly privately owned. Balance sheet data are
taken at t − 1. This is important since credit decisions in t on how to set
firms’ interest rates on credit lines are based on balance sheet information
that has typically a lag.
17
We match these four sources obtaining a dataset of bank-firm lending re-
17
For more information, see http://www.cerved.com/xportal/web/eng/aboutCerved/aboutCerved.jsp.
The methodology for the calculation of the 7−score, computed annually by CERVED, is
provided in Altman et al. (1994).
44
Table B1 Summary statistics
Zscorein2008:Q4 Obs.
T‐bank
(1)
Credit
History
(2)
LTD
Log
Loans
Spread
2007:Q2
(3)
Spread
2010:Q1
(3)
1=Safe 4,045 0.68 10.92 0.991 7.48 3.81 5.38
2=Solvent 7,968 0.69 10.36 0.995 7.65 3.94 5.65
3=Vulnerable 67,614 0.71 10.33 0.981 7.89 4.39 6.33
4=Risky 106,697 0.72 9.35 0.963 7.91 4.88 7.33
Total 186,324 0.72 9.78 0.971 7.88 4.64 6.86
Note:(1)Shareofloansthatisgrantedbyabankthathasitsheadquarteroutsidethesameprovincewhere
thefirmhasitsheadquarter.(2)Numberofyearselapsedsincethefirsttimeaborrowerwasreportedto
theCreditregister.(2)Interestrateoncreditlinesminusonemonthinterbankrate.
lationships. In the paper we focus on multiple lending by selecting those firms
which have a credit line with at least two Italian banks in June 2008. This
limits the analysis to 216,000 observations. However, around 80% of Italian
non-financial firms have multiple lending relationships, so this selection does
not limit our study from a macroeconomic point of view.
We clean outliers from the data, cutting the top and bottom fifth per-
centile of the distribution of the dependent variables we use in the regression.
An observation has been defined as an outlier if it lies within the top or bot-
tom fifth percentile of the distribution of the dependent variables (:
),I
and
1
),I
). After these steps our sample reduces to around 185,000 observations
(75,000 firms), which we use for the empirical analysis. The following table
gives some basic information on the main variables used in the regressions.
Appendix C. Robustness checks
We have checked the robustness of the results in several ways.
(1) Main bank. As there is not a clear consensus on the way rela-
tionship characteristics are identified, we have tested the robustness of the
results by including in the baseline regressions an additional measure of re-
lationship banking, namely a dummy for the “main bank”. This dummy
typically captures “incentive to monitor” effects or “skin in the game” ef-
fects. In particular, we have first calculated the share of loans granted by
45
each bank to the firm and constructed two variables: i) the highest share
of lending granted by the main bank (`cr:/); ii) a dummy (`ci:) that
is equal to one if that bank grants the highest share of lending to the firm.
However, as in several cases many banks had a pretty low and similar share
of total lending, we have decided to consider as “main bank” only those fi-
nancial intermediaries that granted not only the highest share but also at
least one quarter of the total loans.
We have therefore modified equations (11)-(13) for the marginal probit
model, the interest rate (:
),I
) and outstanding loans in real terms (1
),I
) in
the following way:
`1(Firm k’s default= 1) = c+¸+:1−:/c:c
I
+``cr:/
I
+i(1−:/c:c
I
∗`cr:/
I
)+
I
(11’)
:
),I
= i +,+¸1 −/c:/
),I
+¬`ci:
),I
+t(1 −/c:/
),I
∗`ci:
),I
)+
),I
(12’)
1
),I
= o +c+j1 −/c:/
),I
+t`ci:
),I
+o(1 −/c:/
),I
∗`ci:
),I
)+
),I
(13’)
where c, i and o are bank-fixed effects, ¸ is a vector of industry fixed effects,
, and c are firm-fixed effects.
The results reported in Table C1.1 indicates that the highest the share
of loan granted to a firm the lower is the probability that the firm goes
into default. At the same time, the effect of transactional loans on default
probability is still in place and similar in magnitude with respect to that in
Table 3. In particular, the probability for a firm to go into default increases
with the share of 1−bank financing and reach the maximum of around 0.4%
when 1 −:/c:c
I
is equal to 1. This result remains pretty stable by enriching
the set of controls with additional firm-specific characteristics (see panel II in
Table C1) or by calculating the proportion of transactional loans 1 −:/c:c
I
not in value but in terms of the number of banks that finance firm k (see
panel III in Table C1).
The main results of our work remain also with respect to the two cross-
sectional equations (12’) and (13’). In line with the predictions of the model,
Table C2 indicates that 1−banks (compared to 1−banks) provide loans at
a cheaper rate in good time and at a higher rate in bad time (see columns
46
I and II). As for loan quantities, other things being equal, T-banks always
provide on average a lower amount of lending, especially in bad times (see
columns III and IV). Interestingly, we find that a bank with a high share
of lending to a given firm tends to grant always lower interest rates and to
further reduce the cost of credit by more in time of crisis. However, we also
find that the main bank reduce the amount of loans in a crisis. This finding
is consistent with the result in Gambacorta and Mistrulli (2013) and may
be interpreted as the effect of more bank risk aversion and a greater need to
diversify credit risk following the crisis.
(2) Region instead than province. One possible objection to the definition
used for the relationship dummy 1−bank is that considering the bank and
the firm as "close" only if both have headquarter in the same province could
be too restrictive. For example, banks may be able to get soft information,
i.e. information that is difficult to codify, which is a crucial aspect of lending
relationships, also if they are headquartered inside the same region where the
firm has is main seat.
We have therefore replicated the results of Table 3 and Table 4 in the main
text by using a different definition for relationship and transaction banks. In
particular, the 1−bank dummy is equal to 1 if firm / is headquartered in the
same region (instead than the province) where bank , has its headquarters;
1−bank is equal to 1 if 1−bank=0. Results reported in Tables C3 and C4
are very similar to those in the main text. Interestingly, the absolute values
of coefficients are slightly reduced pointing to the fact that informational
asymmetries increase with functional distance.
(3) All foreign banks are T-banks. In the paper we divide 1−banks and
1−banks according to the distance between the lending bank headquarters
(at the single bank level, not at the group level) and firm headquarters.
This raises some questions for foreign banks (subsidiaries and branches of
foreign banks). Following this definition, branches of foreign banks are always
1−banks. This classification is correct because lending strategic decisions are
typically taken by the bank’s headquarter located outside Italy.
However, these loans have not a big weigh in the database and represent
only 0.04% of the cases. On the contrary, subsidiaries of foreign banks are
treated as the Italian banks. This hypothesis seems plausible as these banks
have legal autonomy and are subject to Italian regulation. However, to test
the robustness of the results we have therefore replicated the estimations
reported in Table 3 and Table 4 by imposing that all foreign bank head-
quartered in Italy and with legal autonomy (around 7% of observations) are
47
1−banks. This means that the 1−bank dummy is equal to 1 if firm / is
not headquartered in the same province where bank , has its headquarters
or bank , is a foreign bank; 1−bank is equal to 1 if 1−bank= 0. Even in
this robustness test results are very similar to the baseline case (see Tables
C5 and C6).
(4) New firms. One of the main hypothesis of the model is that at t = 0
no bank can distinguish firms’ type. To make the empirical part closer to the
theoretical onet we have therefore estimated equations (11)-(13) on a subset
of around 6,000 “new firms”, that entered the credit register in the period
2005:Q2:2007:Q2. The results are qualitatively very similar to that obtained
from the baseline equations (see Tables C7 and C8).
48
49

Figure 1
Average firm cash flows in state S

Figure 2
100% Transactional Banks Payoff
50


Figure 3
Bank lending, interest rates and the business cycle in Italy
(a) Bank lending to the private sector
1, 2

–5
0
5
10
15
20
2003 2004 2005 2006 2007 2008 2009 2010
Medium and large non-financial firms
Small non-financial firms
Households

(b) Interest rate on overdraft and interbank rate
1, 3

0
2
4
6
8
2003 2004 2005 2006 2007 2008 2009 2010
Interest on overdrafts (a)
3-month interbank rate (b)
Spread (a) - (b)

(c) Real GDP and stock market capitalization
4, 5

750
1,000
1,250
1,500
1,750
2,000
2,250
345
350
355
360
365
370
375
2003 2004 2005 2006 2007 2008 2009 2010
Real GDP (right axis)
Stock market capitalization

Notes. The vertical line indicates Lehman’s default.
1
Monthly data.
2
Annual growth rates. Bad loans are
excluded. The series are corrected for the impact of securitization activity.
3
Percentage points. Current
account overdrafts are expressed in euro.
4
Quarterly data.
5
Real GDP in billions of euro. Stock market
capitalization refers to the COMIT Globale Index, 31 Dec. 1972 = 100.
Sources: Bank of Italy; Bloomberg.
51


Figure 4
Lending supply and interest rate setting by banks’ type and state of the world
1

(a1) Interest rate: good times (2007:q2) (a2) Interest rate: bad times (2010:q1)
(b1) Lending: good times (2007:q2) (b2) Lending: bad times (2010:q1)
1
This figure reports a graphical representation of the results in Table 5. The horizontal axis of each graph reports the Z-score,
an indicator of the probability of default of firms. These scores can be mapped into four levels of risk: 1) safe; 2) solvent; 3)
vulnerable; 4) risky. The vertical axis of graphs (a1) and (a2) indicate the level of the interest rate applied by the two bank types
on credit lines to the 4 different kinds of firms; those of graphs (b1) and (b2) report the log of lending in real terms supplied by
the two bank types.

52

Figure 5
Graphical analysis of the results in Table 5 without fixed effects
1

(a1) Interest rate: good times (2007:q2) (a2) Interest rate: bad times (2010:q1)
(b1) Lending: good times (2007:q2) (b2) Lending: bad times (2010:q1)
1
This figure reports a graphical representation of the results obtained re-running the same models reported in Table 5 without
fixed effects. The horizontal axis of each graph reports the Z-score, an indicator of the probability of default of firms. These
scores can be mapped into four levels of risk: 1) safe; 2) solvent; 3) vulnerable; 4) risky. The vertical axis of graphs (a1) and
(a2) indicate the level of the interest rate applied by the two bank types on credit lines to the 4 different kinds of firms; those of
graphs (b1) and (b2) report the log of lending in real terms supplied by the two bank types.
53

Table 1 Descriptive statistics. Bank-firm relationship
Bank-firm loan types


Obs.


%


Spread
good time
(2007:q2)
(a)
Spread
bad time
(2010:q1)
(b)

(b) -(a)
Log Loans
good time
(2007:q2)
(c )
Log Loans
bad time
(2010:q1)
(d)

(d) -(c)
Capital to
asset ratio
(2007:q2)
(e)
Capital to
asset ratio
(2010:q1)
(f)
(f)-(e)


ALL FIRMS

i) Relationship only 18693 10.1% 4.3 6.2 1.9 7.74 7.73 -0.011 9.103 8.794 -0.31
ii) Both types 84598 45.8% 4.5 6.7 2.2 7.96 8.00 0.036 8.843 8.743 -0.10
iii) Transactional only 81604 44.1% 4.8 7.1 2.3 7.78 7.81 0.029 8.547 8.793 0.25
Total 184895 100.0% 4.6 6.8 2.2 7.86 7.89 0.028 8.739 8.770 0.03
H-FIRMS
i) Relationship only 18489 10.1% 4.2 6.2 1.9 7.74 7.73 -0.006 9.096 8.79 -0.30
ii) Both types 84129 45.9% 4.5 6.7 2.2 7.95 7.99 0.039 8.543 8.56 0.02
iii) Transactional only 80493 44.0% 4.8 7.1 2.3 7.77 7.80 0.032 8.842 8.79 -0.05
Total 183111 100.0% 4.6 6.8 2.2 7.85 7.88 0.031 8.730 8.69 -0.04
L-FIRMS
i) Relationship only 206 11.6% 6.0 9.0 3.0 8.07 7.90 -0.169 8.98 8.70 -0.28
ii) Both types 439 24.6% 5.9 9.4 3.5 8.54 8.33 -0.207 8.949 9.04 0.09
iii) Transactional only 1139 63.8% 6.3 9.7 3.5 8.17 8.06 -0.113 8.648 8.88 0.24
Total 1784 100.0% 6.2 9.6 3.4 8.25 8.11 -0.143 8.760 8.90 0.14
Note: L-Firms are those that went into default in the period 2008:q3-2010:q1, H-Firms are the remaining ones.

54

Table 2 Effect of Bank-firm relationship on the marginal probability of a firm’s default



Dependent variable: P(default
k
=1)
(I)
Baseline
equation
(II)
Firm specific
characteristics
(III)
Alternative
Weight
Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0032 *** 0.0029 ***
(0.0008) (0.0007)
T-share (number of banks) 0.0028 ***
(0.0007)

0.0051 *** 0.0051 ***

(0.0005) (0.0001)
LTD -0.0002 -0.0002
(0.0018) (0.0018)
Small firm -0.0021 -0.0021
(0.0034) (0.0034)
CREDIT_HISTORY -0.0002 *** -0.0001 ***

(0.0000) (0.0000)
Bank fixed effects Yes Yes Yes
Industry-province dummies Yes Yes Yes
Number of obs. 72,489 72,489 72,489
Pseudo R
2
0.1273 0.1395 0.1397
The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-
2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable
T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We
report the share both in loan value and in terms of number of T-banks. Parameter estimates are
reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for
industry-province dummies and bank fixed effects are not reported.

55

Table 3 T-banking and R-banking in good times and bad times
Variables

Interest rate
good time
(2007:q2)
(I)
Interest rate
bad time
(2010:q1)
(II)
Log Loans
good time
(2007:q2)
(III)
Log Loans
bad time
(2010:q1)
(IV)

T-Bank -0.0805*** 0.1227*** -0.2753*** -0.3129***
(0.0174) (0.0210) (0.0123) (0.0110)

Bank fixed effects yes yes yes yes
Firm fixed effects yes yes yes yes
Number of obs. 184,859 184,859 184,859 184,859
Adjusted R-squared 0.529 0.585 0.426 0.473
Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in
2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The
coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates
are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed
effects are not reported.
56

Table 4 Comparing T-banking, R-banking and firms’ quality
Variables

Interest rate
good time
(2007:q2)
(I)
Interest rate
bad time
(2010:q1)
(II)
Log Loans
good time
(2007:q2)
(III)
Log Loans
bad time
(2010:q1)
(IV)

T-Bank -0.3309*** -0.3977*** 0.0795* 0.1023**
(0.0604) (0.0737) (0.0393) (0.0413)
R-Bank*Z 0.3479*** 0.5016*** 0.1036*** 0.1329***
(0.0148) (0.0178) (0.0115) (0.0096)
T-Bank*Z 0.4238*** 0.7076*** 0.0575*** 0.0577***
(0.0119) (0.0151) (0.0092) (0.0062)
US>GR 0.8825*** 1.5181*** 0.6887*** 0.5667***
(0.0193) (0.0192) (0.0093) (0.0075)
LTD -0.3697*** -0.3760*** -0.0603* -0.0796***
(0.0453) (0.0561) (0.0330) (0.0213)
Small firm -0.0854 0.2037 -0.3993*** -0.4688***
(0.2295) (0.2463) (0.0968) (0.0784)
CREDIT_HISTORY -0.0475*** -0.0619*** 0.0460*** 0.0404***
(0.0020) (0.0023) (0.0013) (0.0009)
Bank fixed effects yes yes yes yes
Firm fixed effects no no no no
Industry-province dummies yes yes yes yes
Number of obs. 184,859 184,859 184,859 184,859
Adjusted R-squared 0.1776 0.2065 0.0865 0.0857
Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and
(IV) in 2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional
bank. The coefficients represent the difference relative to relationship banking (R-banks).
Parameter estimates are reported with robust standard errors in brackets (cluster at individual
bank level). The symbols *, **, and *** represent significance levels of 10%, 5%, and 1%
respectively. Coefficients for industry-province dummies and fixed effects are not reported.

57

Table 5 Capital endowment and bank type
Variables

Baseline
model

(I)
Bank-specific
characteristics

(II)
Firm-specific
characteristics

(III)
Financially
constrained
firms
(IV)

T-share -3.839*** -3.276** -3.091** -3.203**
(0.890) (1.301) (1.267) (1.265)
Bank size -0.040 0.090 0.092
(0.280) (0.268) (0.264)
Bank liquidity ratio -0.009 -0.011 -0.003
(0.016) (0.019) (0.017)
Retail ratio 0.049*** 0.031* 0.029*
(0.017) (0.017) (0.017)
Proportion of small firms in the
bank’s credit portfolio 6.169 5.972
(4.248) (4.115)
Proportion of LTD firms in the
bank’s credit portfolio -2.422 -2.141
(3.723) (3.712)
Average Z-score of the bank’s
credit portfolio -1.611 -1.337
(2.468) (2.563)
Proportion of financially
constrained firms (US>GR) 5.392
(6.603)
Bank zone dummies yes yes yes yes


Number of obs. 179 179 179 179
Adjusted R-squared 0.130 0.185 0.217 0.218
Notes: The dependent variable is the regulatory capital/risk-weighted asset ratio at 2008:q2 prior
to Lehman’s default. The variable T-share represents the proportion of transactional loans (in
value) for bank j. It takes the value from 0 (pure R-bank) to 1 (pure T-bank). All bank-specific
characteristics and credit portfolio characteristic are at 2008:q1. Parameter estimates are reported
with robust standard errors in brackets (cluster at individual bank level). The symbols *, **, and
*** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for bank zone
dummies are not reported.

58

Table 6 Lending relationship and bank-capital
Variables
Interest rate
good time
(2007:q2)
(I)
Interest rate
bad time
(2010:q1)
(II)
Log Loans
good time
(2007:q2)
(III)
Log Loans
bad time
(2010:q1)
(IV)

T-Bank -0.0792** 0.1940** -0.1625*** -0.2208***
(0.0402) (0.0734) (0.0282) (0.0289)
CAP 0.0096 -0.0426*** -0.0112 0.0113**
(0.0185) (0.0123) (0.0086) (0.0052)
US>GR 0.1881*** 0.1611*** 0.5315*** 0.1403***
(0.0228) (0.0430) (0.0174) (0.0193)
MUTUAL -0.7812*** -1.0057*** 0.0573 0.0569
(0.1284) (0.1066) (0.0378) (0.0523)
Bank group and rescue dummies yes yes yes yes
Bank zone dummies yes yes yes yes
Firm fixed effects yes yes yes yes

Number of obs. 184,859 184,859 184,859 184,859
Adjusted R-squared 0.4856 0.5433 0.4161 0.4530
Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in
2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The
coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates are
reported with robust standard errors in brackets (cluster at individual bank group level). The symbols *, **,
and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for dummies and firm
fixed effects are not reported.


59

Table C1 Effect of Bank-firm relationship on the marginal probability of a firm’s
default. Including Main bank dummy and its interaction with T-share.



Dependent variable: P(default
k
=1)
(I)
Baseline equation
(II)
Firm specific
characteristics
(III)
Alternative
Weight
Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0042 *** 0.0036 ***
(0.0011) (0.0009)
T-share (number of banks) 0.0036 ***
(0.0015)
Maxsh
-0.0123 *** -0.0108 *** -0.0106 ***

(0.0022) (0.0018) (0.0019)
Maxsh*T-share(in value) -0.0041 * -0.0033 *
(0.0023) (0.0019)
Maxsh*T-share(number of banks) -0.0035 *
(0.0020)

0.0048 *** 0.0048 ***

(0.0004) (0.0004)
LTD -0.0006 -0.0006
(0.0017) (0.0017)
Small firm -0.0020 -0.0020
(0.0032) (0.0032)
CREDIT_HISTORY -0.0002 *** -0.0002 ***

(0.0001) (0.0001)
Bank fixed effects Yes Yes Yes
Industry-province dummies Yes Yes Yes
Number of obs. 72,489 72,489 72,489
Pseudo R
2
0.0782 0.1190 0.1190
The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-
2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable T-
Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We report
the share both in loan value and in terms of number of T-banks. The variable Maxsh indicates the
highest share of lending that is granted by the main bank. Parameter estimates are reported with robust
standard errors in brackets (cluster at individual bank level). The symbols *, **, and *** represent
significance levels of 10%, 5%, and 1% respectively. Coefficients for industry-province dummies and
bank fixed effects are not reported.

60

Table C2 T-banking and R-banking in good times and bad times. Including Main bank
dummy and its interaction with T-bank.
Variables

Interest rate
good time
(2007:q2)
(I)
Interest rate
bad time
(2010:q1)
(II)
Log Loans
good time
(2007:q2)
(III)
Log Loans
bad time
(2010:q1)
(IV)

T-Bank -0.0896*** 0.1086*** -0.1504*** -0.2067***
(0.0201) (0.0243) (0.0121) (0.0116)
Main -0.0969*** -0.1705*** 1.1652*** 0.8594***
(0.0232) (0.0281) (0.0130) (0.0130)
Main*T-Bank -0.0080 -0.0233 0.0325 0.0125
(0.0301) (0.0361) (0.0366) (0.0164)

Bank fixed effects yes yes yes yes
Firm fixed effects yes yes yes yes
Number of obs. 184,859 184,859 184,859 184,859
Adjusted R-squared 0.529 0.586 0.585 0.570
Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in
2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The
coefficients represent the difference relative to relationship banking (R-banks). The dummy Main is
equal to one if that bank grants the highest share of lending to that firm. Parameter estimates are
reported with robust standard errors in brackets (cluster at individual firm level). The symbols *, **,
and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed effects
are not reported.

61

Table C3 Effect of Bank-firm relationship on the marginal probability of a firm’s
default. Changing relationship lending definition from province to region.



Dependent variable: P(default
k
=1)
(I)
Baseline
equation
(II)
Firm specific
characteristics
(III)
Alternative
Weight
Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0024 *** 0.0024 ***
(0.0007) (0.0007)
T-share (number of banks) 0.0034 ***
(0.0007)

0.0051 *** 0.0051 ***

(0.0004) (0.0004)
LTD -0.0002 -0.0002
(0.0018) (0.0018)
Small firm -0.0020 -0.0018
(0.0034) (0.0035)
CREDIT_HISTORY -0.0001 ** -0.0002 **

(0.0000) (0.0000)
Bank fixed effects Yes Yes Yes
Industry-province dummies Yes Yes Yes
Number of obs. 72,489 72,489 72,489
Pseudo R
2
0.0612 0.1004 0.1003
The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-
2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable
T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We
report the share both in loan value and in terms of number of T-banks. Parameter estimates are
reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for
industry-province dummies and bank fixed effects are not reported.

62

Table C4 T-banking and R-banking in good times and bad times. Changing
relationship lending definition from province to region.
Variables

Interest rate
good time
(2007:q2)
(I)
Interest rate
bad time
(2010:q1)
(II)
Log Loans
good time
(2007:q2)
(III)
Log Loans
bad time
(2010:q1)
(IV)

T-Bank -0.0748*** 0.1038*** -0.2428*** -0.256***
(0.0182) (0.0217) (0.0123) (0.0110)

Bank fixed effects yes yes yes yes
Firm fixed effects yes yes yes yes
Number of obs. 184,859 184,859 184,859 184,859
Adjusted R-squared 0.529 0.585 0.426 0.472
Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in
2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The
coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates
are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed
effects are not reported.

63

Table C5 Effect of Bank-firm relationship on the marginal probability of a firm’s
default. All foreign banks subsidiaries are T-banks.



Dependent variable: P(default
k
=1)
(I)
Baseline
equation
(II)
Firm specific
characteristics
(III)
Alternative
Weight
Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0031 *** 0.0027 ***
(0.0009) (0.0007)
T-share (number of banks) 0.0027 ***
(0.0007)

0.0051 *** 0.0051 ***

(0.0004) (0.0004)
LTD -0.0002 -0.0002
(0.0018) (0.0018)
Small firm -0.0021 -0.0021
(0.0034) (0.0034)
CREDIT_HISTORY -0.0002 ** -0.0002 **

(0.0000) (0.0000)
Bank fixed effects Yes Yes Yes
Industry-province dummies Yes Yes Yes
Number of obs. 72,489 72,489 72,489
Pseudo R
2
0.0600 0.0994 0.0994
The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-
2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable
T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We
report the share both in loan value and in terms of number of T-banks. Parameter estimates are
reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for
industry-province dummies and bank fixed effects are not reported.

64

Table C6 T-banking and R-banking in good times and bad times. All foreign
banks subsidiaries are T-banks.
Variables

Interest rate
good time
(2007:q2)
(I)
Interest rate
bad time
(2010:q1)
(II)
Log Loans
good time
(2007:q2)
(III)
Log Loans
bad time
(2010:q1)
(IV)

T-Bank -0.0844*** 0.1030*** -0.2737*** -0.2970***
(0.0180) (0.0218) (0.0128) (0.0115)

Bank fixed effects yes yes yes yes
Firm fixed effects yes yes yes yes
Number of obs. 184,859 184,859 184,859 184,859
Adjusted R-squared 0.529 0.585 0.426 0.473
Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in
2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The
coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates
are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed
effects are not reported.

65

Table C7 Effect of Bank-firm relationship on the marginal probability of a firm’s
default. New Firms.



Dependent variable: P(default
k
=1)
(I)
Baseline
equation
(II)
Firm specific
characteristics
(III)
Alternative
Weight
Coef. Sig. Coef. Sig. Coef. Sig.

T-share (in value) 0.0120 ** 0.0073 **
(0.0054) (0.0035)
T-share (number of banks) 0.0067 **
(0.0033)

0.0036 0.0036

(0.0024) (0.0024)
LTD -0.0018 -0.0018
(0.0073) (0.0073)
Small firm 0.0070 0.0070
(0.0025) (0.0025)
CREDIT_HISTORY 0.0033 0.0033

(0.0035) (0.0035)
Bank fixed effects Yes Yes Yes
Industry-province dummies Yes Yes Yes
Number of obs. 5,866 5,866 5,866
Pseudo R
2
0.0596 0.1470 0.1470
The models estimate the marginal probability for a firm k to go into default in the period 2008:q3-
2010:q1. All explanatory variables are evaluated at 2008:q2, prior Lehman's default. The variable
T- Share indicates the proportion of loans that firm k has borrowed from a transactional bank. We
report the share both in loan value and in terms of number of T-banks. Parameter estimates are
reported with robust standard errors in brackets (cluster at individual bank level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for
industry-province dummies and bank fixed effects are not reported.

66

Table C8 T-banking and R-banking in good times and bad times. New Firms.
Variables

Interest rate
good time
(2007:q2)
(I)
Interest rate
bad time
(2010:q1)
(II)
Log Loans
good time
(2007:q2)
(III)
Log Loans
bad time
(2010:q1)
(IV)

T-Bank -0.0844*** 0.1030*** -0.2737*** -0.2970***
(0.0180) (0.0218) (0.0128) (0.0115)

Bank fixed effects yes yes yes yes
Firm fixed effects yes yes yes yes
Number of obs. 5,866 5,866 5,866 5,866
Adjusted R-squared 0.529 0.585 0.426 0.473
Notes: The models in column (I) and (III) are estimated in 2007:q2; those in columns (II) and (IV) in
2010:q1. The dummy T-Bank takes the value of 1 if the loan is granted by a transactional bank. The
coefficients represent the difference relative to relationship banking (R-banks). Parameter estimates
are reported with robust standard errors in brackets (cluster at individual firm level). The symbols *,
**, and *** represent significance levels of 10%, 5%, and 1% respectively. Coefficients for fixed
effects are not reported.

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